London Stock Exchange to go under hammer

London, November 2:

Euronext, the Dutch-French exchange considering a bid for the London Stock Exchange, is to embark on a major consultation with its investors after being given clearance - with crucial provisions - by the Competition Commission to bid for the London market.

After a seven-month investigation, the competition watchdog has concluded that Euronext and its German rival Deutsche Borse can make offers for the LSE provided they make changes to protect the way trades are processed and cleared through the stock market system.

Euronext chief executive, Jean-Francois Theodore, is expected to conduct a survey of his shareholders’ views to gauge whether or not he has their support for a bid, that could cost at least GBP1.5bn.

He is likely to be mindful that his counterpart at Deutsche Borse, Werner Seifert, was pushed out of his job after shareholders refused to support his attempt to take over the LSE. Deutsche Borse is only likely to bid in extreme circumstances leaving Euronext and the Australian bank Macquarie as possible bidders.

Any decision by Euronext to bid may not be taken until 2006, dragging the uncertainty about the future of the LSE into its second year. Deutsche Borse kick-started what may become a bidding war when it signalled its interest in a takeover in December 2004. Some Euronext shareholders are thought to be concerned about the cost of a bid. Euronext has said it is considering an all-cash bid for the LSE, although there have been suggestions it might use some of its own shares to mount any offer.

In a short statement, Euronext said, “Euronext will, in close consultation with its shareholders, assess all available strategy options to maximise shareholder value.’’ The Dutch-French exchange needs to work out the financial implications of the Competition Commission’s dictat that it not only reduce its voting influence over clearing system LCH Clearnet but also cut its shareholding to 15 per cent from 41.5 per cent.

While the watchdog had been expected to issue rulings on the ownership of the clearing systems, observers suggested that the requirement to cut its voting rights and its shareholding was more draconian than predicted. The commission also wants Euronext to cut its board representation on LCH Clearnet to one from four of the 18 seats.

Michael Long, analyst at Keefe Bruyette and Woods, said: “Euronext would become a forced seller in LCH clearnet if it wanted to bid for the LSE.’’ Finding a buyer for the stake may not be easy for Euronext and the commission could appoint a trustee to conduct the sale if it were not completed within a certain timeframe.

“Although the timeframe required for the divesture has not and will not be publicly announced, Euronext will be told privately when it would be expected to sell the required stake in LCH Clearnet. Otherwise the stake will be sold on its behalf, potentially incurring a significant capital loss. We believe this could deter a bid for the LSE,’’ Long said.