LSE and Deutsche Börse target €450m annual merger savings

The London Stock Exchange Group and Deutsche Börse are targeting €450 million in annual cost savings from their merger, which would create the largest exchange group in Europe and a formidable competitor to US rivals.

Man with union jack umbrella walks by the London Stock Exchange

The cost synergies identified by the exchange groups will amount to €450 million a year from the third year after the deal’s completion, according to the two companies, which said the amount was roughly 20% of their combined adjusted operating costs for 2015 of some €2.2 billion.

The targeted savings were revealed as the two groups released detailed plans for how their merger would work in practice on March 16, as they said they had reached agreement on terms of a recommended deal.

They had been been forced to confirm that they were in negotiations on February 23 after media reports on the talks that sent the LSE’s share price soaring.

That disclosure, and a further release of information on February 26, said that the new company would be domiciled in the UK, but dual listed in Frankfurt and London, with Deutsche Börse shareholders holding 54.4% of the new firm and LSE shareholders 45.6%. The new details confirm this information.

Both firms had set up a holding company in the UK on March 9, jointly administrated by both Deutsche Börse and the LSE.

The merger will be structured as a voluntary takeover of the two businesses by the new parent, known as the TopCo, in which all shares will be acquired by the new firm.

The corporate structures of the two firms will remain largely the same, with the LSE maintaining a one-tier board system, and Deutsche Borse a two-tier system. Both firms also stressed the importance of maintaining a presence in both London and Frankfurt, with the TopCo domiciled in the UK and resident solely there “for tax purposes”.

The firms said that they expect the merger to be completed by the end of 2016, or during 2017, if the necessary approvals from shareholders and regulators in the EU, US and Russia are secured.

Carsten Kengeter will be the CEO of the combined firm, with LSE chairman Donald Brydon taking the same position. Xavier Rolet, chief executive of the LSE, will step down upon completion of the merger and become an advisor for one year.

However, the deal is likely to face challenges from several fronts. Intercontinental Exchange Group, which is a serious player in European derivatives markets through its 2013 acquisition of NYSE Euronext, has already confirmed that it is considering a bid to acquire the LSE. It has until March 29 to make an offer for the company, under UK takeover rules.

The Wall Street Journal reported on March 1 that the Chicago Mercantile Exchange Group may also seek to disrupt the merger through its own bid, but the firm has not officially confirmed this yet.

The deal is also expected to face significant scrutiny from the European Commission on competition grounds, given the commanding position in clearing that a combination of LCH.Clearnet and Eurex Clearing, owned by the LSE and Deutsche Börse respectively, would enjoy.

German lawmakers in the Hesse region, which includes Frankfurt, are also said to be uneasy about the prospect of Deutsche Börse’s ultimate parent company being headquartered in London. This is due to a potential diminishing of Frankfurt’s status as a financial centre which could result, and also from the possibility of the UK leaving the European Union, placing a key part of Germany’s financial infrastructure beyond the EU’s oversight.

A referendum on UK membership is set for June 23, 2016. The Hesse financial regulator has the power to block the merger should it wish to do so.

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