Bets are off as firms do battle for London Stock Exchange
23 January 2006
The battle lines have been drawn in the fight for the London Stock Exchange (LSE), but there's no telling who the victor will be.
While the French, the Germans and even the Australians have been stalking the exchange, it's anyone's guess as to which foreign flag the LSE will eventually operate under - if any at all.
Just 18 months ago, the LSE seemed likely to slip into the hands of a rival European exchange, but competition issues and Macquarie Bank's rival bid have combined to throw a spanner in the works.
This week the LSE, represented by corporate partner Graham Nicholson of Freshfields Bruckhaus Deringer, is due to release its response document to Macquarie's £1.5bn hos- tile bid.
Last month, the LSE embarrassed the Australian lender after the exchange rejected Macquarie's 580p-a-share offer as "wholly inadequate".
Macquarie's bid sparked an outcry by leading members of the LSE, who called on Gordon Brown to intervene, complaining that such a deal would hand the near-monopoly enjoyed by the LSE to a private company funded by huge debts.
A mud-slinging match ensued, with Macquarie accusing the exchange of "poor cost control" and "expansion failures" as part of its formal offer document.
Baker & McKenzie won the lead role advising Mac- quarie, largely because the majority of City firms were conflicted out. Helen Bradley has been leading the team, supported by Michael Caro and Tim Gee on equity, as well as Chris Hogan on debt.
Milbank Tweed Hadley & McCloy corporate partner Tim Emmerson has a bit part advising Macquarie's financial adviser Goldman Sachs. Linklaters is also acting on Macquarie's side for Dresdner bank, which is providing the debt financing.
Macquarie's initial bid, which was forced after the Takeover Panel issued a 'put up or shut up' order in November 2005, has been labelled "a blatant attempt to acquire the exchange on the cheap" and is expected to be thrown out by the LSE.
Much of the legal and business community has been baffled by Macquarie's takeover strategy, with cynics branding the possible purchase as nothing more than a "trophy".
"You have to wonder what [Macquarie] is doing, because a stock exchange is not really what it does. It's a totally different business. You have to wonder why it wants it, and indeed what it would do with it," a corporate partner at a City firm said.
Even though the odds are stacked against the Australians, it would be unwise to rule them out just yet. As the only would-be buyer at the table with no regulatory issue to overcome, it might be the best offer the LSE gets.
Meanwhile, the LSE has held double-barrelled talks with Germany's Deutsche Börse and Franco-Dutch exchange Euronext to sell the exchange.
On the M&A aspects of the deal, Ashurst corporate heavyweight Adrian Clark has been acting for Deutsche Börse, while Slaughter and May partners Frances Murphy and Nilufer von Bismark have represented Euronext. Cleary Gottlieb Steen & Hamilton Paris-based capital markets and finance partner John Brinitzer has also advised Euronext on M&A, along with Simon Jay in London and Andrew Shutter on finance aspects of the deal.
One of the key battles for Deutsche Börse and Euronext has been competition. Deutsche Börse competition matters were dealt with by Ashurst's director of economics Mat Hughes, while Cleary's competition partner Nick Levy acted for Euronext.
To their lawyers' credit, both Deutsche Börse and Euronext were cleared by the Competition Commission. However, they are still in talks with the regulator over conditions imposed on any formal takeover attempts.
The LSE turned down Deutsche Börse's initial bid in December 2004, but it created enough interest to spark an inquiry into the competition issues surrounding a possible acquisition. Since then, Deutsche Börse has endured a management shake-up, which has prompted questions as to whether the case should have been brought by the regulator.
As a silver circle competition partner comments: "How can the Competition Commission hear a case when there's no clear management structure in place at the company in question? It shouldn't really happen."
Following a seven-month investigation, the Competition Commission found that both bids would "substantially lessen competition" and ruled that the deals would only get the green light if the buyers agreed to reduce their control over the LSE's clearing house, LCH Clearnet, in the event of a merger.
The Competition Commission argued that the bidders' control over share clearing would make it difficult for rival exchanges to compete with the LSE.
LCH Clearnet is known to have instructed Clifford Chance corporate partner Jonny Myers.
Deutsche Börse was last year forced to postpone its 530p-a-share offer for the LSE following a raft of complaints by shareholders.
Likewise, Euronext has been under mounting pressure from its shareholders to avoid paying a premium price for the exchange.
Euronext is understood to be considering its options as to whether to make a formal bid for the LSE, with some reports stating that the operator could walk away from the transaction due to the recent share-price rises.
A withdrawal by Euronext could possibly pave the way for Macquarie after all.
Late last year, Euronext and Deutsche Börse confirmed that they had held exploratory talks to consider a joint venture, but negotiations have since cooled off.
One source close to the deal told The Lawyer that talks with the Competition Commission are due to be completed by mid-February. "I wouldn't be surprised if Euronext made its formal approach sometime in March, which would start the whole process off again. It's likely to be months before this reaches a conclusion," said the source.
Another source suggests that the Takeover Panel could thwart Deutsche Börse's and Euronext's stalling tactics by ordering them to put their best offers forward. "It's in both Euronext's and Deutsche Börse's interests to wait for the share prices to drop before making their bid, so they could try to slow the process - but the Takeover Panel might also put a stop to that," he said.
The conclusion to this protracted battle for the LSE remains unclear and, like any good cliffhanger, the saga is likely to keep us on the edge of our seats until the very end.
The possibilities are endless, including the fact that the LSE may even choose to stay independent off the back of its recent success.
As to whether the future owner turns out to be Australian, German or French, your guess is as good as any.
All the lawyers involved declined to comment.