It is currently anybody’s guess as to whether the London Stock Exchange (LSE) will end up operating under a German flag or a French one, but after 200 years in British hands, it is now certain that it will be sold to a rival European exchange.
The LSE, represented by Freshfields Bruckhaus Deringer, is holding twin-track talks with Germany’s Deutsche Börse and Franco-Dutch exchange Euronext to sell the exchange, having turned down an initial offer from Deutsche Börse last December.
That said, the issues thrown up when the LSE wheeled out its for sale sign are dwarfed by those faced by, for example, Tesco, Asda and Sainsbury’s when they failed to get clearance to buy Safeway last year.
No analyst, or indeed unaffiliated competition lawyer, has seriously suggested that a regulator in London, Germany or Brussels would turn down either deal outright.
The question is one of tactics. When the LSE turned down Deutsche Börse’s initial bid, chief executive Clara Furse cited uncertainties about the competition regulators’ attitude to a merger.
As always, the winner will be decided on price; but regulatory certainty, and specifically how quickly the deal can be done, will be key issues for Furse.
The rival bidders have different competition issues. Deutsche Börse has made the vertical integration of its exchange and clearing and settlement business a strategic priority. Euronext already owns one London exchange, the London International Financial Futures and Options Exchange (Liffe), but has kept clearing and settlement more separate.
Merger clearance could concievably be decided either at national level in the UK (and in Germany in the case of a Deutsche Börse deal) or on a pan-European basis by the European Commission.
In either jurisdiction, clearance for either bid could go to a second stage, but it is more likely in the case of a tie-up with Deutsche Börse. Euronext will no doubt play its stronger card very hard in the negotiations.
So what are the competition lawyers up to? By the time you read this, Deutsche Börse will have formally filed its initial takeover bid for the LSE with both the Office of Fair Trading (OFT) in the
UK and Germany’s Federal Cartel Office, and there are advantages for the exchange in keeping the decision at a national level.
Deutsche Börse brought Ashurst on board way back in 2003, so the firm has had plenty of time to plan. Corporate heavyweight Chris Ashworth is advising on tactics and the firm’s director of economics Mat Hughes is leading the charge on the competition front.
Euronext has yet to make an offer for the LSE, but its lawyers will have spent the last couple of weeks scurrying around the various regulators having what the OFT describes as “fireside chats”.
In the UK, this consists of an informal discussion with the OFT’s case team. Later the lawyers could also request confidential informal guidance, with the advantage of including the views of other UK regulators such as the Financial Services Authority.
Euronext has historically had a rock-solid relationship with Cleary through the US firm’s French and Belgian offices. But Cleary just isn’t big enough in London to handle a transaction of this size and complexity, and Euronext’s investment bank Morgan Stanley recommended that the the French exchange bring in Slaughters.
Cleary Brussels partner Nick Levy will oversee any Continental filings, but the US firm does not have a competition partner in London, although it does have senior associate Shaun Goodman, a Slaughters old boy. Goodman has retained a residual role on the UK competition side, but it doesn’t take a genius to work out that Slaughters partners Bertrand Louveaux and Malcolm Nicholson will take the lead.
This could be a relief for the OFT’s director of mergers Simon Priddis, as he won’t have to deal so closely with his old firm. He was a senior associate at Cleary in Brussels and may well go back to the US firm as a partner when his tenure at the OFT is over.
Priddis was widely panned for his decision on the Wm Morrison-Safeway merger, when he referred Morrisons to the Competition Commiss-ion rather than passing it at
Ownership of the LSE is a political minefield and Priddis will be in the spotlight of the world’s press for months. But might he pass the buck to Brussels?
The combined turnover of either a Euronext-LSE tie-up or a Deutsche Börse tie-up would not meet the threshold for an automatic referral to the Commission. But (and it may well be Euronext’s strategy to argue that this should happen with a Deutsche Börse bid) a merger could conceivably be referred to the Commission under Article 22. Under this provision, the OFT could ask the Commission to take the LSE off its hands. However, it would be almost impossible in practice to do this unless the German Federal Cartel Office also refers a Deutsche Börse tie-up, otherwise the investigations would overlap.
Query whether, on such a highly political deal, either the Federal Cartel Office or the OFT would be willing to cede control.
The OFT handled the merger between London Clearing House (LCH) and Clearnet, a subsidiary of Euronext, as well as Euronext’s acquisition of Liffe, so it could reasonably claim to have the expertise.
The German exchange’s advisers must be cheered by a paragraph in last year’s OFT report into the LSE’s issuer fees. The regulator concludes: “At present there is no serious threat to [the LSE’s] position of strength in the market for issuing and public trading of UK equity.”
If Priddis keeps hold of the deal, he may ultimately refer it to the Competition Commission, but at least it would remain in London.
However, there may be political pressure from Brussels to hand the deal over. The Commission has made financial services the centrepiece of its competition policy and a more integrated market for share trading was a key aim of the Lisbon agenda.
The EU’s new Competition Commissioner Neelie Kroes would also love to get her hands on the deal. Whether she can succeed will be at the forefront of Furse’s mind when she picks her horse.
All the lawyers involved declined to comment.