Euronext and Börse plan merger talks

Euronext, the Franco-Dutch suitor of the London Stock Exchange, is to enter talks with the Deutsche Börse about a rival deal.

A Euronext-Deutsche Börse deal would leave only one potential bidder for the LSE, the Australian bank Macquarie, which could be able to pick it up for much less than the current £1.45bn market value.

The move is being forced on Euronext by shareholders - in particular, the hedge funds Atticus Capital and TCI - which have built large stakes in both Euronext and Deutsche Börse in the hope of forcing a merger between the two.

Shareholders made Deutsche Börse drop its attempts to buy the LSE earlier this year, so forcing the departure of its chief executive, Werner Seifert.

They are now telling Euronext's chief executive, Jean-François Théodore, that they are concerned that it might overpay for the LSE, and that he should seriously look at an alternative tie-up with Deutsche Börse.

Mr Théodore has always maintained that, for Euronext, the LSE is a far bigger prize. Euronext is the second-largest cash equities exchange in Europe, behind the LSE. Bringing the two exchanges together would deliver major synergies and cost savings, not lease because Euronext owns the London derivatives market Liffe.

Euronext's lawyers have advised it that a merger with Deutsche Börse would cause huge competition issues, because Liffe and the Börse's Eurex dominate the exchange-traded derivatives market.

The hedge funds believe that the over-the-counter derivatives market, where financial instruments are often created for specific purposes, is so much larger than the exchange-traded market that the European Commission would allow a merger between Deutsche Börse and Euronext to go through.

The pressure on Euronext increased last week when the Competition Commission ruled that it would have to cut its stake in its clearing operation LCH.Clearnet to 15 per cent if it were to buy the LSE.

Euronext is to consult its investors about whether this is a price worth paying, and is unlikely to reveal its decision this side of Christmas.

Meanwhile Mr Théodore is due to meet with Deutsche Börse's new chief executive, Reto Francioni, and will raise the prospect of a possible merger.

"If our shareholders want us to talk to the Börse then we will have to consider it," a Euronext insider said.