Deutsche Börse Woos LSE Resolutely

In the latest stage in the battle for the venerable London exchange, LSE management on Thursday again turned up its nose at Deutsche Börse's amicable offer of "no less than 530 pence per share" for just under €2 billion ($2.6 billion) in all. The price was the same as the informal bid made by the German stock market operator in December, which had also been rejected by the LSE at the time.

"The board believes firmly that this proposed pre-conditional cash offer does not recognize the inherent value in the London Stock Exchange's business, the related synergies available in a combination and the attractive growth prospects that the London Stock Exchange enjoys under its existing management team," the LSE said in a statement.

Deutsche Börse's response was prompt.

"We may improve our offer," chief financial officer Mathias Hlubeck told a telephone news conference.

And chairman Werner Seifert (photo) also refused to be put off, saying the German suitor would focus on wooing LSE shareholders and users instead.

"We will be talking to customers and shareholders (of the LSE) and are looking forward to that," Seifert said. A road-show was set to start on Friday.

The battle continues

Seifert refused to answer questions about whether Deutsche Börse was prepared to launch a hostile bid. But that possibility did not seem to be ruled out completely. Deutsche Börse said its offer was "subject to the sole precondition that the LSE's board resolves to give an unqualified and unconditional recommendation to its shareholders to accept the offer." If the LSE board did not give the green light to the bid, "Deutsche Börse reserves the right to waive, in whole or in part, the above pre-condition."

In the meantime, the LSE indicated it would continue to hold parallel talks both with Deutsche Börse and its archrival Euronext, operator of the Paris, Amsterdam, Brussels and Lisbon stock exchanges, with a view to obtaining "a significantly improved offer." Euronext in Paris confirmed that takeover talks on a cash offer for LSE were underway and said it expected to submit an offer to the British Office of Fair Trading "imminently."

In its charm offensive, Deutsche Börse promised that the LSE would continue to be "solely regulated" by the British regulatory body, the Financial Services Authority (FSA). Established market models including the Alternative Investment Market (AIM) "would be supported and maintained." Sterling would remain the trading currency for British stocks and London "would be promoted as the primary destination for the listing and trading of UK and international stocks."

Soothing anxieties

And in reply to fears that a tie-up with Frankfurt, which has its clearing and settlement operations under one roof, could push up trading, clearing and settlement costs for LSE users, Deutsche Börse promised immediate sharp price reductions. These included a 10 percent cut in tariffs for electronic book order trading from next year. And it would charge only half what LCH.Clearnet currently charged for clearing.

Deutsche Börse also offered to base the combined cash equities, derivatives and clearing businesses in London, and LSE chief Clara Furse would be offered the job of being in charge of cash equities. At the same time, seven of Deutsche Börse's 14-strong supervisory board would have "close ties to the City of London."

On its own home front, Deutsche Börse sought to assuage the concerns of its own shareholders and the German authorities by promising to retain its global headquarters in Frankfurt. Listing and trading activities as well as regulation in the Frankfurt market would also be unaffected.

Deutsche Börse intended to finance the deal by a combination of cash and loans, chief financial officer Hlubeck said. Seifert said a merger would boost pre-tax profit by €100 million each year from 2008, while restructuring costs would be less than €100 million. No job losses were envisaged in London in the event of a merger. The "lion's share" of the restructuring costs would be for developing a new generation cash trading platform, using the best aspects of Deutsche Börse's Xetra and the LSE's SETS electronic systems.

Shares in LSE edged up 0.09 percent in early afternoon trading to 575 pence on the news, while Deutsche Börse shares were showing gains of 1.04 percent at €47.47.