Exclusive Merged European Exchange Could Be Based in Netherlands, Sources Say

The merged London and Frankfurt stock exchanges could be legally based in the Netherlands to defuse a dispute that threatens the $14.3 billion fusion, Bloomberg reported citing unnamed people with knowledge of the situation. Shareholders of the London Stock Exchange yesterday overwhelmingly approved the hook-up, which would combine Europe’s two largest stock exchanges to create a rival big enough to compete with leading exchanges in the United States and Asia. The potential compromise to base the holding company of the LSE-Deutsche Börse fused exchange in the Netherlands could help overcome objections in Germany. Under the proposal announced in March, the Deutsche Börse would acquire the LSE but the new headquarters would remain in London. But following Britain’s vote last month to leave the European Union, regulators in Germany and elsewhere on the continent have objected to placing control of Europe’s stock exchange outside the 28-nation bloc, and outside of E.U. financial control. Even before the Brexit vote, shareholders in the Frankfurt-based Deutsche Börse had criticized the plan to base the merged entity in London. According to unnamed people cited by Bloomberg, one possible solution to the impasse may be to place the holding company of the merged exchange in the Netherlands, and have the LSE and Deutsche Börse continue to run dual operating centers from London and Frankfurt. Christoph Schalast, who leads mergers and acquisitions studies at the Frankfurt School of Finance and Management, said the Dutch option has the potential to break the impasse and enable the merger of the two stock exchanges. “Now, following the Brexit vote, this is an alternative that is likely to be embraced by shareholders and regulators,” Mr. Schalast said in an interview with Handelsblatt Global Edition. Deutsche Börse shareholders have until July 12 to submit their shares. It is the third attempt to merge the exchanges. The first two failed amid antitrust concerns. Mr. Schalast said that roughly the same group of institutional investors own stakes in both the London and Frankfurt exchanges, and that approval by a majority of Deutsche Börse shareholders was likely. More importantly, the Dutch compromise is likely to persuade the Economics Ministry in the German state of Hessen, where Frankfurt is based, and which holds the final regulatory authority to permit or block the merger in Germany. The agency, based in Wiesbaden, had previously expressed skepticism over basing the new headquarters in London. “I think this solution, however, is likely to be more palatable to the authorities in Wiesbaden,” Mr. Schalast said. The Netherlands solution is also likely to appease European antitrust regulators, he said, who are the other regulator with the power to block the deal. Whether such a politically driven compromise would undermine the savings that the takeover is supposed to generate remains unclear. Management of both exchanges say the fusion makes sense, regardless of Britain’s Brexit decision, because Europe needs an exchange big enough to compete globally. “I think it is correct that such a solution — with the operative centers remaining in Frankfurt and London — will of course undermine the savings that this merger is supposed to generate,” Mr. Schalast said. In March, at a public event sponsored by the Deutsche Börse, Mr. Schalast said he proposed a similar solution to the exchange’s chief executive, Carsten Kengeter. At the time, Mr. Kengeter said he didn’t favor such as solution because he didn’t want to have to commute between Frankfurt, London and third destination. But now, perhaps, Mr. Schalast said, Mr. Kengeter will reconsider — to clear the final hurdle to the deal. Picture source: DPA