Brussels set to vet £1.35bn Deutsche Börse bid for LSE

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The Independent Online

The London Stock Exchange, which has rejected a £1.35bn takeover bid from Deutsche Börse, will hold talks with the German exchange today to see if a "significantly improved proposal" can be agreed.

The London Stock Exchange, which has rejected a £1.35bn takeover bid from Deutsche Börse, will hold talks with the German exchange today to see if a "significantly improved proposal" can be agreed.

The LSE said the bid was too low and could be blocked on competition grounds. The LSE - and its customers - have concerns about Deutsche Börse's vertical structure: it owns clearing and settlement houses which give it extra pricing power.

While a takeover of the Stock Exchange by its bigger rival would legally come under the scrutiny of the Office of Fair Trading (OFT), it is likely that it would ultimately go to the European Commission for a decision.

A counter bid could come from Euronext, the pan-European bourse based in Paris. Its head, Jean-Francois Theodore, is understood to have visited London yesterday. While Deutsche Börse does not have a presence in London, unlike Euronext, which owns Liffe, its supervisory board includes members such as Mehmet Dalman, the former head of Commerzbank's investment banking operations in London, who now runs a hedge fund.

If a deal emerges, Brussels would want to scrutinise it. Under European Union merger rules, the commission investigates only if the companies involved in a merger exceed certain turnover thresholds. The exception to this is if both companies generate more than two-thirds of their EU revenues within the same member state. A combination of the LSE with Deutsche Börse would not meet the threshold test and while the LSE does more than two-thirds of its business in the UK, the German exchange does not.

Yet article 22 of the merger rule book states that if the commission believes there are wider European ramifications, it can ask for the case to be passed to Brussels. The national regulator does not have to comply but in the past the OFT has co-operated.

Moreover, John Vickers, the OFT chairman, when talking about Deutsche Börse's previous attempt to merge with the LSE in 2000, saw some merit in passing such a case to Brussels if requested. In a speech at the Fordham conference in October 2001, he said the merger would have raised "fascinating issues, which OFT officials were relishing. It was clear that only close co-operation between the OFT and the Bundeskartellamt [Germany's competition watchdog] was likely to resolve satisfactorily some of the issues which arose from that merger."

But he added: "Arguably, though, given the number of companies from other countries listed on these exchanges, this was a case that would have been more appropriately handled by Brussels."

Meanwhile, Deutsche Börse believes that a deal would be scrutinised by the OFT and the Bundeskartellamt.

Merging the listing and trading functions of the two exchanges does not appear to be a competition issue, as the combined group would control less than 50 per cent of European equity trading. The LSE has a market share of 28 per cent, Deutsche Börse 14 per cent and Euronext, which runs the Paris, Amsterdam, Brussels and Lisbon exchanges, 23 per cent.

An industry insider said that while there could be a long tussle with Brussels, the legal hurdles could be overcome.

Shares in the LSE have soared in recent weeks on speculation of an impending bid, largely driven by hedge fund activity. They closed up 4p at 544p yesterday.

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