€27bn tie-up between Deutsche Boerse and London Stock Exchange faces Brexit scrutiny

Deutsche Boerse and London Stock Exchange (LSE) agreed to combine in a $30 billion (€27bn) deal to create a European trading powerhouse better able to compete with US rivals encroaching on their turf.

But the deal, which marks a third attempt to link the Frankfurt and London exchanges, may prompt a takeover war after New York Stock Exchange owner Intercontinental Exchange said it may bid for the British group.

Nearly 16 years after Deutsche Boerse first tried to take over LSE, the exchanges said last month they were discussing an all-share merger, which they confirmed yesterday would give Deutsche Boerse shareholders 54.4% and LSE investors 45.6% of a new company.

This offers a unique opportunity for Frankfurt which has always played second fiddle to London as a global financial centre, something recognised by the German government which said it would welcome the deal if it strengthened Frankfurt.

If it goes ahead, the combination would create the world’s biggest exchange by revenue, forecast at €4.7bn this year from stock, bond and derivatives trading, indices, market data, and clearing and settlement.

The exchanges sought to sell the deal to investors with the lure of annual cost savings of €450 million.

They also promised users — the banks and fund managers who pay fees to trade and companies who pay to be listed — “substantial benefits”, but gave no figures.

And in a clear effort to win over Europe’s politicians to the benefits of a dominant pan-European exchange, Deutsche Boerse chief executive Carsten Kengeter said it would enable Europe to enhance its capital markets.

This chimes with EU plans for a “Capital Markets Union” to compete better with the US and Asia.

Deutsche Boerse has been under pressure because Europe was the “natural space” for expansion for North American and Asian rivals. Despite these incentives, the deal faces questions over Britain’s EU referendum and whether regulators will approve a huge presence in derivatives clearing.

“The major test lies in the regulatory hurdle which, combined with added scrutiny in the context of Brexit, places the onus on the two companies to make a compelling case for the deal over the coming months,” said Peter Gray, a lawyer at Cavendish Corporate Finance.