Talk of a merger between Euronext and Deutsche Boerse - reportedly backed by Deutsche's main shareholder - raises the specter of anti-trust objections but cannot be ruled out in the face of increased US competition, analysts said on Tuesday.
Deutsche Boerse's largest shareholder, UK hedge fund The Children's Investment Fund (TCI), was quoted by German newspapers as saying a merger embracing markets from Frankfurt to Paris, Amsterdam and Lisbon would make sense after Boerse failed to win control of the London exchange. TCI, which also owns a stake in Euronext, declined to comment. It had been the voice of investor opposition against Boerse's attempt to buy London's LSE, a revolt that culminated in Boerse CEO Werner Seifert quitting the group on Monday.
On paper, a combination of continental European bourses with a pool of companies whose stocks are collectively worth 2.6 trillion euros, looks attractive, analysts said.
It would create a share and derivatives market leader with joint revenues of more 2.3 billion euros and possibly greater synergies than those which Boerse and rival Euronext said they could generate from a take-over of the LSE.
That's a prospect that both parties have themselves considered, several analysts and bankers said, noting that their managements held consultations talks last summer.
"This merger would involve significant cost and revenue synergies, create a European champion between two companies trading on similar multiples, and lessen the risk for shareholders of seeing Deutsche Boerse and Euronext fighting separately for expensive targets like the LSE," analyst Claire Langevin at Exane BNP Paribas said.
German newspapers Handelsblatt and Wirtschaftswoche quoted Patrick Degorce, a partner at TCI, as saying a tie-up would be "fantastic" and make more sense than an expensive LSE take-over.
Such a Euronext-Boerse deal would be difficult to carry through, observers say, mainly due to regulatory and competition-related issues.
The combined entity would dominate a vast majority of Europe's shares and derivatives trading.
It would also hold a near monopoly on derivatives, with (Boerse's) Eurex and (Euronext's) LIFFE being "virtually the only derivatives exchanges," Exane's Langevin said.
Yet some analysts say rising global competition may make EU anti-trust authorities more flexible in their approach.
"The recently announced NYSE-Archipelago merger, as well as the potential CBOT-CME tie-up may convince regulators and competition authorities that the arena for securities and derivatives trading is not regional but global in nature," said analyst Mamoun Tazi at Bear Stearns.
The New York Stock Exchange struck a deal last month to merge with electronic market Archipelago, and there has been talk a merger between the Chicago Mercantile Exchange and the Chicago Board of Trade could follow amid a flurry of financial exchange consolidation.
For now all that remains theory, though Euronext and Boerse shares both rose as merger speculation took hold on Tuesday.
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