Börse hints at higher offer for LSE

Deutsche Börse dropped a strong hint last night that it is prepared to raise its bid for the London Stock Exchange after a conditional offer valuing the business at £1.3bn was rejected.

Werner Seifert, the chief executive of the German exchange, said that cost savings from a takeover of the LSE were likely to exceed its €100m (£69m) estimate, which would enable Deutsche Börse to pay more.

Although the LSE said that the offer of "not less than" 530p a share was insufficient, it left the door open to a higher bid from either the Frankfurt-based group or Euronext, its Paris-based rival.

Detailing a series of concessions on pricing and the independence of the LSE, designed to win over its customers as well as shareholders, Mr Siefert pledged that a merged group would become the first global stock exchange with the power to challenge America's dominance in world markets.

The London exchange responded: "The LSE is willing to continue to hold discussions with Deutsche Börse and Euronext about the possibility of a significantly improved offer."

Euronext will make a submission to the Office of Fair Trading "imminently" about its plans to bid, putting its offer on the same regulatory timetable as the German proposals, as far as competition issues are concerned, "Based on its analysis and discussions with the LSE, Euronext firmly believes that a combination of Euronext and the LSE would yield significant cost and revenue synergies and would be beneficial both to the LSE's shareholders and its users," it said.

Mr Seifert said European companies listed in London and Frankfurt would compete more effectively with American rivals because of their lower costs of capital if the merger went through.

Yesterday's document from Deutsche Börse also tried to allay fears that a merger would fall foul of competition regulators worried over its domination of the post-share trading market in clearing and settlement.

Mr Seifert said Deutsche Börse would continue with the long-term arrangement for the LSE's clearing and settlement to be handled by CrestCo while a new contract would be offered to LCH.Clearnet which provides the trade guarantee function for the LSE.

However, in return for a one-year contract extension, Deutsche Börse expects LCH to reduce its clearing guarantee price by 50 per cent to benefit LSE customers. Other fee reductions would come from a cut in trading costs of 10 per cent, with prices capped for at least five years with a guarantee that trading fees would never exceed current levels.

Deutsche Börse's publication of its plans for merging with the LSE drew backing from its shareholders, who had been concerned about the lack of information.

Richard Lacaille, of State Street Global Advisers, which owns 1.6 per cent of Deutsche Börse and 2 per cent of the LSE, said: "It is encouraging that we have got more information about their new revenue synergies and cost cuts. I don't think they have damaged themselves in any way by introducing this information to the public domain."

Mr Seifert said the deal would produce €100m of extra pre-tax profits each year from about €25m of extra revenues through new business opportunities and €75m from reduced costs. He said yesterday that he expected that with more due diligence those cost savings were likely to rise.

The document from Deutsche Börse also tried to allay fears that a merger would fall foul of competition regulators worried about Deutsche Börse's domination of the post-share trading market in clearing and settlement.

Mr Seifert said the deal would be earnings-enhancing in its first full financial year, with a return on investment of 8 per cent. There will also be a new corporate governance structure put in place for the enlarged group to ensure changes to the LSE go through a rigorous approval process. Management in charge of equities and derivatives trading as well as clearing would be resident in London, which would account for about half of the group's revenues.