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Europe’s $30 Billion Exchange Merger Is Going Ahead

But will Brexit wreck the deal?But will Brexit wreck the deal?
But will Brexit wreck the deal?Rob Stothard—Getty Images

The two biggest exchange groups in Europe said Wednesday they had reached an agreement on a $30 billion merger, 16 years after they first looked at combining.

The merger of Germany’s Deutsche Börse AG (DBOEY) and London Stock Exchange Group Plc (LDNXF) will create one of the biggest platforms for derivatives trading in the world, allowing its members to cut the costs associated with holding large volumes of products such as interest-rate swaps and options. Regulation introduced in the wake of the 2008 financial crisis has sharply increased the amount of capital that banks have to hold in reserve against potential losses, making the business much more expensive.

But the deal comes as Europe’s financial markets approach a major crossroads, only three months before the U.K., which is home to the continent’s financial capital, holds a referendum on leaving the European Union. If the U.K. votes to stay in (as the two companies currently expect), then the combined group will be in prime position to exploit the E.U.’s latest efforts to simplify and deepen its capital market, breaking down many of the barriers to cross-border investment within the E.U. that still remain.

The consequences for the deal of a British vote to leave the E.U. are far harder to predict. A U.K. government report published last week warned of a “decade of uncertainty” if the country votes out, as it would then have to renegotiate from scratch its trade relations with the remainder of the E.U. The City of London fears it would be among the biggest losers of that process, due to the long-standing skepticism toward ‘Anglo-Saxon capitalism’ on the continent and lobbying from of rival financial centers to restrict London-based firms’ access to the Single Market.

The two companies said Wednesday that they have set up a committee “whose purpose is to consider the ramifications of any vote for the United Kingdom to leave the European Union.”

 

The deal is still being billed as a merger of equals (reflected in an equal distribution of board seats between the two), but Deutsche Boerse has the higher market value and its chief executive, Carsten Kengeter, has been designated as CEO for the combined group. LSEG chairman Donald Brydon will take over as chairman while Xavier Rolet, the long-standing LSEG CEO, will step down. Deutsche Börse’s shareholders will own 54.4% of the combined group, while LSEG’s will get 46.6%.

Germany’s Deutsche Börse AG and the British-Italian London Stock Exchange Group Plc (LSEG) said their deal would be a merger of equals, with the board occupied by equal numbers of representatives from both sides.

The two companies reckon they will be able to strip 450 million euros ($499 million) a year from annual costs after merging. The group will be domiciled in the U.K., but will have corporate HQs in both countries.

It isn’t clear yet whether Atlanta-based Intercontinental Exchange Inc. (ICE) will respond with the counter-offer that it said it was considering earlier this month: the German group is already offering a substantial takeover premium—LSE Group’s shares have risen 25% since the news first broke in February. However, the deal unveiled on Wednesday doesn’t include require LSE Group to pay any break-up fee if it fails to be concluded (due largely to the risks of the Brexit referendum).

A spokesman for LSE Group declined to comment on “hypothetical external bids,” while a spokeswoman for ICE declined to comment to Fortune Wednesday.