LSE and Deutsche Boerse to offer customers major savings from merger

The London Stock Exchange and Deutsche Boerse will pledge almost $7bn of customer savings from their proposed merger and are planning to announce a merger agreement next week, according to reports, as the pair look to block potential rival bids from the US.

Although the merger is expected to produce cost synergies for the two companies of £220-250m, insiders on the deal told the Financial Times they believe it would bring much larger capital savings of $5bn-$7bn for banks and investors from "compressing" overlapping trades on the two exchanges.

As well as officially announcing the merger agreement next week, Reuters reported the pair are targetting cost synergies of much more than €300m (£233.5m).

Management at both companies are keen on gaining customer and investor support for their deal, to ward off potential for gatecrashing bids from across the Atlantic.

Banks and major investors in Europe and further afield would certainly be impressed by the mooted size of savings, with the LSE's Exhibit A being the multi-billion-pound savings gained from clearing house LCH.Clearnet in a similar compression to interest rate derivatives trades.

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

"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."

But analysts at the Swiss bank said they 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.

It has also been suggested Deutsche Boerse has the capacity to improve its offer by including a cash sweetener, although this would rule out a nil premium all share merger-of-equals.

Bid battle potential

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.