Monday, February 14, 2011 Deutsche Boerse/NYSE deal far from done by Davidmailto:[email protected] Brierley The proposed merger between Deutsche Boerse AG and NYSE Euronext may hit a regulatory wall. Although the deal has been widely celebrated by analysts and mar- kets, there is a very real problem in merging two of the world’s larg- est derivatives and equities trading businesses, not least in Europe. In many areas, the combined market shares are very high indeed. A particular problem is European exchange-traded derivatives, widely perceived to form the heart of the deal. In Europe, Eurex, owned by Deutsche Boerse, and Liffe, owned by NYSE Euronext, operate an effective duopoly. This is where cost reduction could make a real difference: Derivatives are growing for NYSE Euronext, while its cash equities business is suffering from the climate of investor uncertainty. “There will be a competition review by the European authorities. Already in derivatives trading, there is not a level playing field. However, there is an opportunity for disposals to get the merger through,” Raul Sinha, a bank analyst at Nomura, told SNL Financial. In a note, Richard Repetto of Sandler O’Neill wrote: “We note that this transaction provides significant scale/overlap in European futures, European cash equities, and U.S. equity options. Therefore, we’d expect a significant antitrust review in each of these areas.” The merged entity would have 43% of U.S. equity options and 30% of pan-European cash equities, aside from near total dominance of European exchange-traded derivatives. Although weak volume growth and rising competition from new exchanges threaten the equities business, the options business is better protected from bank-sponsored competition. Merging Eurex and Liffe means effectively combining two jewels in one crown. Without this, the deal would be significantly less attractive in terms continued on page 2 mailto:[email protected] 6 e=3&featureID=4 http://www.snl.com/Interactivex/MyInteractive.aspx?mod The Daily Dose: European Financials Edition SNL’s daily morning wrap-up of financial news from Europe’s major publications. Ready from 8:30 a.m. London time. http://www.snl.com/Marketing/HTML_Email/Current/10024/DailyDose.pdf If you experience difficulties or have any questions, please e-mail us at [email protected] or call us at +1.888.275.2822. http://www.snl.com/marketing/microsite/EuropeanBanks/index.htmlhttp://www.snl.com/marketing/microsite/Eu 7 Birchin Lane, London, EC3V 9BW, UK Phone: +44 (0)20 7398 0870 News fax: +44 (0)20 7398 0871 snl.com SNLFinancial © 2011, SNL Financial LC. All Rights Reserved. Proprietary and Confidential. Use limited and subject to SNL license. Monday, February 14, 2011 Page 2 Deutsche Börse/NYSE continued of cutting costs and growth potential, although Deutsche Boerse recently slashed costs is likely to cap any potential further increase has suffered from lackluster trading in European equities deriva- in scale benefits,” Sinha said. tives too. The tie-up between Deutsche Boerse and NYSE Euronext looks good “In the derivatives area, there are very high market shares. If the on paper, creating a giant with revenue equivalent to 90% of CME Deutsche Boerse had to sell Liffe, that would be unattractive,” a Group Inc.’s, excluding energy. However, the regulators, perhaps Frankfurt-based analyst, who declined to be named, told SNL, pushed by the international bank clients of the exchanges, might observing that the parties involved would probably have sounded well stop it happening as envisaged. If asset disposals are required out the competition authorities before proposing the deal. in Europe, they might well undermine the economic rationale of “The big question from my perspective is the demands regula- the deal. Moreover, there are significant technology risks that could tors make for agreeing to the deal. The question is whether the beset the combined entity and prevent it from achieving its cost- European authorities will not demand the sale of Liffe and Eurex,” cutting goals. James Angel, a professor at Georgetown University in Washington, Consolidation among exchanges has been a feature of the sector. told the Handelsblatt. This reflects the need for scale to combat both cost and revenue There are also significant execution risks. Cost synergies are esti- pressures. Yet there is a significant list of failed deals in recent years. mated at €300 million, equivalent to 14% of the combined cost As Sinha at Nomura points out, London Stock Exchange Group base. These are said to come from economies of scale in technol- Plc has had approaches from Deutsche Boerse, Euronext and The ogy, clearing operations, market operations and corporate center NASDAQ OMX Group Inc., among others. functions. The proposed merger between Deutsche Boerse and NYSE Euronext The NYSE was looking to set up its own clearing business in Europe. is far from becoming a done deal. Using Deutsche Boerse’s Clearstream technology instead represents COMPANIES REFERENCED IN THIS ARTICLE: the opportunity for significant savings. However, NYSE Euronext NYSE Euronext NYX clears thorough LCH.Clearnet, and moving onto the Clearstream platform may face contractual restrictions. CME Group Inc. CME Deutsche Börse AG DB1 Combining technology or choosing one technology over another, often a make-or-break decision, is fraught, and the exchanges have London Stock Exchange Group Plc LSE a history of errors. “On paper, it looks good. There are risks in IT, The NASDAQ OMX Group Inc. NDAQ and it is a real question whether it will work in reality,” the Frankfurt Close: $28.12 +0.30 (+1.1%) Vol: 2,613,123 analyst said. http://www.snl.com/interactivex/feedback.aspx?Id=12331115&Action=estory E-mail this story. “The complexity of integration would be significant. Achieving cost synergies in an environment where both exchanges have already Merger Stories Deal Announcement At a press conference, Aydin said Türkiye Halk Bankasi posted a Türkiye Halk Bankasi AS HALKB 2 billion Turkish lira profit for 2010 and increased the number of Close: TL12.45 +0.10 (+0.8%) Vol: 8,015,455 employees on its payroll to 13,450 from 12,505 in 2009. Over the same period, the number of branches increased to 705 from 665 in Türkiye Halk Bankasi AS will acquire a major stake in Macedonian the year-ago period. IK Bank, Türkiye Halk Bankasi general manager Hüseyin Aydin said, according to a Feb. 11 report from Andolu News Agency. European Financials Daily The Financial Industry Delivered to Your Desk via E-mail Each Morning Published by: SNL Financial LC (ISSN 2156-5392) © 2011 Gabe LeDonne, Editor Akash Sinha, Managing Editor Kris Niswander, Product Manager Paul Henderson, Director, News Mike Chinn, President and CEO Nina Flynn, Subscriptions Manager Subscription Sales: E-mail: [email protected] Phone: +44 (0)20 7398 0870 Advertising: E-mail: [email protected] Phone: +44 (0)20 7398 1305 SNLFinancial 7 Birchin Lane London, EC3V 9BW, UK Phone: +44 (0)20 7398 0870 Fax: +44 (0)20 7398 0871 http://www.snl.com mailto:mailto:[email protected]@snl.com To submit news for publication, fax releases to +44 (0)20 7398 0871 or e-mail the news departmentmailto:[email protected] at [email protected]. SNL reserves editorial judgment concerning all submissions. 7 Birchin Lane, London, EC3V 9BW, UK Phone: +44 (0)20 7398 0870 News fax: +44 (0)20 7398 0871 snl.com SNLFinancial © 2011, SNL Financial LC. All Rights Reserved. Proprietary and Confidential. Use limited and subject to SNL license. Monday, February 14, 2011 Page 3 Merger Stories Aydin said the bank “will be one of the leading banks [in Deal Completion Macedonia].” Banca Popolare dell’Emilia Romagna Scarl BPE As of Feb. 10, 1 Turkish lira was equivalent to 62.72 U.S. cents. Close: €9.18 -0.04 (-0.4%) Vol: 334,484 E-mail this story. Banco Santander SA SAN http://www.snl.com/interactivex/feedback.aspx?Id=12332226&Action=estory Close: €8.84 +0.09 (+1.0%) Vol: 45,459,890 Deal Approval Banca Popolare dell’Emilia Romagna Scarl announced Feb. 10 that unit Meliorbanca SpA sold Meliorbanca Private SpA to Banco Türkiye Is Bankasi AS ISCTR Santander SA subsidiary Santander Private Banking SpA for about Close: TL5.22 +0.04 (+0.8%) Vol: 50,913,100 €27 million. Türkiye Is Bankasi AS received approval from the Russian authorities According to the statement, the price is based on Meliorbanca for its acquisition of Bank Sofia, Sabah reported Feb. 11, citing a Private’s latest book value and the funds it has under management statement from the lender. and administration. At the time the deal was first announced in The acquisition is pending approval by the Russian central bank. September 2010, the price based on the net asset value as of June In 2010, it was revealed that Türkiye Is Bankasi agreed to acquire 30, 2010, and the value of assets managed by the unit would have Bank Sofia for $40 million. been about €32 million. On the day the closing of the deal was announced, Santander paid http://www.snl.com/interactivex/feedback.aspx?Id=12330226&Action=estory E-mail this story. an initial tranche of about €19 million to Meliorbanca. However, the final price will be subject to a partial post-closing adjustment depending on the amount of funds held under management and administration by Meliorbanca Private, the statement said, without giving a specific time frame. All the required approvals for the deal have already been received. Banca Popolare dell’Emilia Romagna said the sale is part of its strat- egy to simplify and rationalize the structure of the group. It is also http://www.snl.com/marketing/microsite/EuropeanBanks/images/6310EuroBankCovList.pdf mailto:[email protected] 7 Birchin Lane, London, EC3V 9BW, UK Phone: +44 (0)20 7398 0870 News fax: +44 (0)20 7398 0871 snl.com SNLFinancial © 2011, SNL Financial LC.