LSE scuppers Deutsche Boerse merger hopes by rejecting EU demand

Mon Feb 27, 2017 11:48am EST
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By John O'Donnell, Pamela Barbaglia and Andreas Kröner

LONDON/FRANKFURT (Reuters) - The London Stock Exchange (LSE.L: Quote) has all but ended a planned merger with Deutsche Boerse (DB1Gn.DE: Quote) to create Europe's biggest exchange, which had faced growing opposition since Britain's vote to leave the European Union.

A demand from European antitrust regulators that it sell a trading platform in Italy was publicly ruled out by the LSE on Sunday, derailing the 29 billion euro ($31 billion) deal and knocking shares in both the LSE and Deutsche Boerse on Monday.

The LSE's decision not to sell MTS, which had been demanded in order to beef up smaller French rival Euronext (ENX.PA: Quote), took the European Commission and Deutsche Boerse by surprise, people familiar with the matter said.

But the failure of the deal had been feared by many involved, amid growing calls from German politicians that the headquarters be shifted from London to Frankfurt because of Brexit - a concession the LSE did not want to make.

Further complicating the picture, German state prosecutors had opened an investigation into Deutsche Boerse Chief Executive Carsten Kengeter, who had been due to head the combined group, for possible insider trading. Kengeter denies any wrongdoing and no charges have been brought.

Nonetheless, the investigation strained already difficult relations, prompting the LSE to question Kengeter's suitability to lead a combined company, two sources familiar with the matter said. LSE Chairman Donald Brydon wrote an email to Deutsche Boerse Chairman Joachim Faber in early February, shortly after prosecutors searched Kengeter's apartment, expressing such reservations, the sources said. The LSE declined to comment.

The breakdown leaves a question mark over the strategy of the exchanges in London, Europe's financial capital, and Frankfurt, the equivalent for Germany, the region's biggest economy.

"Brexit changed everything," said Bill Cash, a British Conservative lawmaker who backed Brexit and who led a parliamentary debate on the merger last week.   Continued...

A woman walks past the London Stock Exchange building in the City of London, Britain, January 16 , 2017. REUTERS/Toby Melville