Euronext raises stakes in LSE battle with pledge of cash bid

The battle for the London Stock Exchange intensified yesterday as Euronext announced its bid would be solely in cash, ahead of talks with the London market.

Deutsche Börse, the rival suitor, yesterday held its third meeting with the LSE, which last month rejected the Börse's indicative cash offer of 530p a share, valuing the London exchange at £1.3bn, as too low.

Both sides said the talks between Werner Seifert, the Börse's head, and Clara Furse, his opposite number at the LSE, were "amicable and constructive". Yesterday's discussions were not about price but focused on "technical" issues such as clearing and customers, in an effort to ensure that any deal would not face regulatory hurdles, sources said. They said Mr Seifert provided further details on the price cuts that would be offered to the exchange's customers if a deal goes through. The talks are expected to resume soon.

It is understood that even though Mr Seifert is keen to speed things up while the LSE wants to get an auction going, any notion that the Frankfurt-based Börse was trying to impose an ultimatum on London was unfounded. Mr Seifert is thought to be keen to stick to his commitment to securing a deal. While there has been speculation about a hostile bid, he told the LSE yesterday that he would not go directly to its shareholders and had no plans to do anything without the management's approval, sources said.

As a sweetener to the LSE, the Börse is offering to manage its Eurex derivatives business from London. Johannes Thormann, an analyst at WestLB in Düsseldorf, said: "It would be sensible to manage Eurex from London. The management are always in London anyway."

Euronext's announcement that any bid for the LSE was "likely to be solely in cash" came as no surprise to analysts. A cash-and-shares offer could have been less attractive than the Börse's cash bid on 13 December. Since then, shares in the LSE have surged to 583p, valuing the market at £1.5bn. Yet it is thought unlikely that the Paris-based Euronext, which also runs the Amsterdam, Brussels and Lisbon exchanges, will put in cash bid at its meeting with the London market today. Analysts and other sources said it was also unlikely that Jean-François Theodore, the head of Euronext, would offer to relocate to London. Half of Euronext's employees are already based in London - at the derivatives exchange, Liffe.

Neither the Börse nor Euronext can afford to lose the battle for Europe's biggest stock market. A merger with either Frankfurt or Paris would create the second-largest exchange in the world after New York. Mr Thormann said: "There is a 45 per cent chance that the Börse will get the LSE, a 45 per cent chance that Euronext will get it and a 10 per cent chance that no deal emerges.''

Deutsche Börse, Europe's largest exchange operator, has more financial fire-power than its smaller rival Euronext. Frankfurt has access to €3.5bn (£2.46bn) from a credit line and convertible bonds, but Euronext could sell its 40 per cent stake in LCH.Clearnet and its near-4 per cent stake in Euroclear, to raise funds, analysts said.

Price is not the only issue: UK brokers have expressed concerns because the Börse runs a "vertical silo" of trading, clearing and settlement, giving it extra pricing power. The German exchange was this week forced to deny reports that it would spin off its Clearstream settlement business to reassure users. Analysts said Mr Seifert would have to make further concessions as well as offering an improved price, rumoured to be 600p a share. But the Börse believes its current offer is "full and fair".