All eyes on D.Boerse as latest exchange merger fails
The London Stock Exchange's aborted bid for the TMX (X-T) Group has raised the tally of failed cross-border exchange deals to three in four as the sector faces an uphill battle to secure longed-for consolidation.
The LSE's failure to win shareholder support for its $3.6 billion bid to create the world's premier trading venue for natural resources and mining firms sent its stock to year highs on Thursday and fuelled hopes it would attract a predator.
But although incumbent exchange operators have sought mergers to secure the economies of scale needed to fend off nimble and aggressive new entrants, increasing execution risk in the wake of the credit crisis has left ambitions in tatters.
The LSE failure follows a decision by U.S. rivals Nasdaq OMX (NDAQ-Q) and the Intercontinental Exchange (ICE-N) to scrap their $11.2-billion US takeover of NYSE Euronext (NYX-N) in May, citing opposition from U.S. regulators.
And the Singapore Exchange was forced to can its $7.8 billion offer for Australia's ASX in April after the Australian Treasury said it was a "no brainer" that the deal would be bad for the nation's economy.
Eyes are now on the Deutsche Boerse's $10.2-billion planned bid for NYSE Euronext to see if the German giant, which wants to cement its position as the world's leading exchange operator, can overcome intense regulatory scrutiny.
The firms, which are wooing investors with a promise of a special dividend, submitted their deal to European competition authorities on Wednesday.
WILL LSE PREDATORS CIRCLE?
The LSE's shares, which have surged 15 percent in the past weeks on hopes it would fail in Toronto and attract a bid itself.
Some analysts value the stock at around 10.8 times 2012 annual earnings forecasts, a premium over the 10.5 times Deutsche Boerse is currently trading at, despite an increasingly risky regulatory and political bid environment.
But shareholders believe nationalistic worries will not upset any London deal.
"Regulators all over the world are taking more interest so a highly leveraged deal is more difficult but politically, I don't see the same obstacles in the UK that we saw in Australia and in Canada," said one of the LSE's largest European shareholders.
As UBS on Thursday added the LSE to its mergers and acquisitions Watch List, market speculation has focused on a possible move by U.S. exchange giant Nasdaq OMX, which has been waiting in the wings since it was snubbed last month over NYSE.
The group tried and failed to buy the LSE twice in 2006 and 2007, latterly bidding 12.43 pounds a share in an offer that was rebuffed initially by LSE management and finally by shareholders.
"We believe there is sufficient scope for cost synergies for Nasdaq to offer up to 11.50 pounds, a 22 percent premium on the current share price while maintaining sufficient earnings accretion for their shareholders to support the deal," UBS said.
But the future of the LSE hangs on its two key Middle East investors, Borse Dubai and the Qatar Investment Authority, who together own more than 36 percent of the company.
"The LSE has two very large shareholders and there's not a huge amount anyone can do if there's only 65 percent up for grabs," noted Richard Semark, MD, head of client trading and execution at UBS.
"The question is whether regulators and politicians understand how the markets are changing at the moment. The markets are no longer national by their nature but there still seems to be nationalism around exchanges."
The withdrawal of the LSE from the TMX battle leaves the path clear for counterbidder Maple, a consortium of Canadian firms playing an unashamedly nationalistic card, which still needs regulatory approval.