LSE and Deutsche Boerse close to announcing merger agreement

London Stock Exchange and Deutsche Boerse are expected to officially announce a merger agreement next week, according to reports.

The LSE and its Frankfurt-based suitor believe the merger could generate eventual cost synergies of much more than €300m (£233.5m), Reuters said, citing several sources close to the deal.

In a note on Monday, Credit Suisse said, assuming synergies equivalent to 15% of combined costs, it estimated the merger could extract circa £280m of annualized pre-tax expense synergies based on a pro-forma cost base of £1.9bn.

"If we apportion 45.6% to LSE shareholders and capitalize it at LSE's pre-deal multiple with a tax rate of 26%, then this would produce about £1.5bn of added value or circa 440p per LSE share."

However, CS analysts saw scope for revenue attrition as the two companies are combined, such as from dealers potentially using the merger to negotiate fee cuts as a condition of giving their consent to the transaction, or pushing the Frankfurt exchange to introduce competitive clearing for its cash equities markets as is currently provided by LSE.

Earlier on Tuesday it was reported that the two European exchanges were also confident of gaining industry support for the deal due to being able to offering customers $5-7bn of savings from the merger.

The pair believe these capital savings for banks and investors will come from "compressing" overlapping trades on the two exchanges, the Financial Times reported.

Bid battle looming?

CME Group, the operator of the Chicago Mercantile Exchange, was reportedly over the weekend to be considering gatecrashing the merger with a bid for either the UK company.

This came after confirmation last week that New York Stock Exchange owner Intercontinental Exchange (ICE) that it was considering a counterbid.

ICE was reported to be mulling potentially spinning off LSE assets such Borsa Italiana and the French arm of the LCH.Clearnet, and could make an offer at a 10% premium to the current share price, according to newspaper reports.