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What next for the LSE and Deutsche Börse?

First Leicester City won the Premier League, then Donald Trump became the presumptive Republican nominee, and now Intercontinental Exchange has ruled out a bid for the London Stock Exchange – it’s been a week to expect the unexpected.

From the moment the LSE and Germany’s Deutsche Börse announced they were in talks over a merger of equals in late February, the exchange world has been waiting for news of a counterbid. Many thought that would come from Jeffrey Sprecher’s derivatives powerhouse ICE.

But on May 4, ICE surprised everyone with an announcement that it would not be bidding for the 215-year-old UK exchange. Explaining why, Sprecher cited a “disappointing level of engagement” from LSE chiefs over a potential tie-up.

In a statement, the LSE said it had provided all the information required of it in accordance with the UK’s Takeover Code.

People familiar with the matter said that, in particular, it was a lack of information provided to ICE on LCH.Clearnet, the clearing house controlled by the LSE, that proved a major stumbling block.

Under UK takeover rules, ICE can’t bid for six months following its May 4 announcement, except under certain circumstances – such as a bid for the LSE from a third party.

So what happens next for ICE, Deutsche Börse and the LSE?

Here are five scenarios.

Likely: LSE/Deutsche Börse deal goes ahead (with remedies)
The two European exchanges move ahead with their planned merger, albeit at a much more relaxed pace without the threat of counterbidders. The prospectus, which sets out further details of the merger as well as a date on which shareholders can vote on it, has not yet been produced and it may not be until after the UK votes on its membership of the European Union, on June 23.

Rival exchanges, clients and other interested parties will wait with baited breath for the EU’s antitrust review of the deal, in which they will be able to put their views across.

Market participants told Financial News they did not think regulators would block the deal, but they could force at least part of the combined group’s clearing operations to be sold as a remedy. These might include the French arm of LCH, which primarily clears equities and derivatives traded on the Euronext markets as well as credit default swaps, and EurexOTC Clear, Deutsche Börse’s over-the-counter clearing operation.

Speaking on ICE’s earnings call on May 4, Sprecher said the EU antitrust review would “open up a lot of opportunity for the entire market to comment on competition issues”.

Possible: Brexit scuppers best-laid plans
Aside from antitrust issues, the deal between the LSE and Deutsche Börse still faces a formidable obstacle in the form of the UK’s referendum on its EU membership. Shareholders may not get to have their say on the deal until after the “Brexit” vote has taken place.

The agreed plan is for the combined group’s holding company to be located and regulated in the UK. However, German authorities could refuse to approve the deal if that holding company ends up outside the EU.

If the UK electorate does vote Leave, then all bets could be off. One immediate impact could be a depreciation of the pound, which would make the deal look worse for Deutsche Börse’s shareholders. If the terms of the deal were to change substantially, it could trigger one of the four scenarios outlined by ICE that would permit it to table a bid within six months.

An LSE spokesman said the merger plans were unchanged and “not conditional on any outcome from the Brexit vote”. He declined to comment further.

Unlikely: Deutsche Börse comes into play
ICE’s withdrawal might make Deutsche Börse the exchange “in play” for potential counterbids. The most obvious candidate to bid for the German exchange would be the US futures giant CME Group, given the complimentary nature of the two businesses. The world’s largest exchange group by market capitalisation, CME has kept its cards close to its chest but it might now take the view that there is an opportunity to grow in Europe that is too good to miss.

However, CME may well look at the experience that seasoned dealmaker Sprecher has had with the LSE – which many believe is more open to foreign ownership than its German counterpart is – and walk away.

Possible: Deal fails to pass muster with shareholders or regulators
It is not outside the realms of possibility that the deal is voted down by either set of shareholders. Regulators could also force the deal to be cancelled – no fewer than 20 authorities need to approve it after all..

The deal falling apart is another of the four scenarios as outlined in Takeover Panel rules that would allow ICE back to the table within six months. However, one M&A adviser close to the deal said LSE shareholders deciding to vote against the Deutsche Börse would be a “nuclear option”, given the precedent in the UK for shareholders to take the deal in hand, rather than hold out for a potential one in the future.

Unlikely: LSE shareholders revolt
The LSE’s shareholders might be so desperate for ICE to make an offer that they persuade the UK exchange’s chief executive Xavier Rolet to engage with his Atlanta-based counterpart. If that hurdle was overcome, the LSE would then need to go to the Takeover Panel and ask for ICE to be able to re-enter the bidding process.

Of course, that would depend on ICE being willing to reconsider a second tilt. On the May 4 earnings call, Sprecher was audibly frustrated at the LSE’s lack of engagement and already seemed to have moved on, saying his exchange was “turning our focus to other opportunities to build on our track record of growth”.

As things stand, ICE will no doubt make sure it is in prime position to exploit any opportunities that arise from the LSE/Deutsche Börse merger.

ICE and Deutsche Börse declined to comment.

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