Stock Market Merger A Battle for the Crown Jewels

Brussels wants more concessions from Deutsche Börse and LSE ahead of their merger. Meanwhile, there is growing political pressure in London.
Quelle: dpa
Trouble is brewing on both sides of the channel.
(Source: dpa)

Carsten Kengeter likes to run long distances, but his current workload could take the chief executive officer of Deutsche Börse to his limits.

In Frankfurt, the public prosecutor's office is investigating Mr. Kengeter for controversial stock purchases. In Brussels, the European Commission is scrutinizing his merger plans with the London Stock Exchange (LSE). And in Wiesbaden and London there is growing resistance to the market merger.

The London Stock Exchange is not an ordinary business, but rather among the "crown jewels" of the London City, Conservative politician William Cash told news agency Reuters this week, calling for a postponement of the market merger.

At least Mr. Kengeter can hope for a green light from Brussels, even if it means that the merger partners will have to make new concessions. Both sides have made considerable progress on what is probably the biggest hurdle: processing derivative transactions. A few weeks ago, the two companies announced that French clearing house subsidiary Clearnet would go to competitor Euronext after the merger.

But the competition watchdogs are still not quite satisfied. They apparently fear that the remaining clearing units of both companies could continue to obstruct competitors in certain sub-markets.

Only one thing is certain about the deal: Deutsche Börse CEO Kengeter still has a long way to go to reach the finish line.

To address the concerns from Brussels, the LSE could agree to process certain trade flows through Clearnet in the future, insiders say.

At issue is the processing of bond and repo transactions. Banks obtain capital on short notice from other banks with repurchase agreements, or repos. The additional concessions could be the key step toward receiving the green light from Brussels. The parties were unwilling to comment on the matter officially. The European Commission plans to decide whether to give its blessing to the merger by early April.

But the next hurdle is already around the corner. Mr. Kengeter and his LSE counterpart, Xavier Rolet, need a solution for the location dilemma. They had agreed to locate the headquarters of the holding company in London. But now that Great Britain has voted to withdraw from the European Union, this is hardly likely to meet with approval in Germany. Politicians in the German state of Hesse are demanding that the holding company be moved to Frankfurt, otherwise they will oppose the merger.

But the idea of moving the legal domicile to Germany faces resistance from British politicians. The situation is complicated, and the arguments are similar on both sides of the English Channel. Everyone is worried about getting a raw deal.

In London, Brexit supporters are especially critical of the proposed merger. It is in the national interest to keep the stock market headquarters in London, Mr. Cash, long skeptical of Europe, said in a parliamentary debate on Tuesday. It also troubles him that Deutsche Börse CEO Kengeter is slated to assume the top job in the merged company.

For this reason, he argued, the government, the Bank of England and the Financial Conduct Authority (FCA) should intervene and prevent something bad from happening – and stop the project until there is clarity over the Brexit strategy.

Other members of parliament vehemently opposed Mr. Cash, noting that a majority of the shareholders voted for the merger. The situation couldn't be that dramatic, otherwise the investors would not have supported it, said Scottish politician George Kerevan, a member of the House of Commons Treasury Select Committee.

Simon Kirby who, as economic secretary to the Treasury, is responsible for the financial sector, indicated that the government sees no reason to intervene in the case, though it is in contact with regulators.

In Hesse, on the other hand, many politicians fear a gradual loss of importance for the Frankfurt stock market if key decisions are made in London. Hesse can block the merger if it believes that it jeopardizes the ongoing development of the stock exchange.

On Wednesday evening, Deutsche Börse's Mr. Kengeter had the opportunity to tout the undertaking before lawmakers. The Exchange Supervisory Authority of the state of Hesse will only decide on the merger once it has received approval from Brussels. This suggests that only one thing is certain about the deal: Mr. Kengeter still has a long way to go to reach the finish line.


Michael Brächer is a financial editor in the investment team in Frankfurt. Till Hoppe reports on politics for Handelsblatt, with a focus on defense, domestic policy and cyber issues. Katharina Slodczyk is Handelsblatt's London correspondent. To contact the authors: [email protected][email protected][email protected]