Complex antitrust questions hang over Deutsche Boerse AG and NYSE Euronext just weeks before shareholders decide whether to endorse a blockbuster exchange merger, though no significant regulatory fixes are expected.
If investors back the $9 billion deal next month, they will have no further say as the two companies sit down at the bargaining table with European regulators in what are expected to be delicate negotiations through the end of the year.
Based on informal discussions so far in Brussels, the exchange operators do not expect to have to accept structural remedies such as divesting businesses to seal the deal, two sources familiar with the transaction said, though less severe behavioral remedies -- on pricing, for example -- may be required.
At issue is the strangle-hold Deutsche Boerse and NYSE Euronext would have on Europe's exchange-based futures market and, significantly, on clearing those trades.
Shareholders and analysts say it is very difficult to predict how the European Commission will react to the near-monopoly, what demands it could make, and whether the companies will ultimately be able to create the world's largest market operator as planned.
We're going to vote for the deal hoping it happens. What we don't know how to handicap is the European regulatory process -- we just can't do that, said Timothy Hoyle, director of research at Pennsylvania-based Haverford Trust Co, which owns 1.2 million shares of NYSE Euronext, parent of the New York Stock exchange.
In our conversations with the NYSE, they've led us to believe that they believe they'll gain regulatory approval with minimal concessions, he said.
Though merger votes are common before regulators sign off on deals, the stakes are high since antitrust and political concerns thwarted two exchange takeovers this year: Singapore Exchange's $8 billion purchase of Australia's ASX Ltd, and an unsolicited bid for NYSE Euronext from Nasdaq OMX Group and IntercontinentalExchange Inc.
NYSE Euronext shareholders vote on July 7, while Deutsche Boerse shareholders have until July 13 to tender shares to the deal. NYSE needs majority support; Deutsche Boerse needs 75 percent.
The next hurdle is in Brussels, where European Union Competition Commissioner Joaquin Almunia set the stage in March when he promised a deep antitrust probe, and later said he was concerned about Deutsche Boerse's vertical silo business model, in which it controls trading and clearing of contracts.
Together, Deutsche Boerse's Eurex and NYSE Euronext's Liffe platforms would dominate futures and options on European bonds, shares and rates -- stoking concern among banks and traders over the prospect of monopoly pricing.
Yet the two sources, who requested anonymity because of the sensitivity of the matter, said the companies do not expect to have to make significant concessions.
It is unlikely there is any legal justification for significant structural remedies, though the exchanges are expecting possibly some behavioral remedies, said a source involved in the antitrust discussions in Brussels.
Behavioral remedies would likely revolve around the pricing of products or terms and conditions on which you make products available to customers, the source said.
So far, the informal talks between regulators and the companies have revolved around clarifying the trading and clearing businesses, said the source.
The exchanges, which announced their deal in February, expect to make a formal filing with the EC in the next couple of weeks, the two sources said. That will kick off a likely two-phase process over some six months in which lawsuits and politics could slow things down.
The deal also needs approval from the U.S. Justice Department and national regulators in Europe, but those reviews are seen as less of a threat.
Deutsche Boerse and NYSE Euronext declined to comment.
NYSE Euronext CEO Duncan Niederauer, who would head the combined company, and Deutsche Boerse CEO Reto Francioni, who would be chairman, have in recent weeks been careful not to presuppose any EC demands.
Niederauer, addressing a New York conference alongside Francioni on June 10, said selling off a major business would be a remote, or very, very unlikely outcome of the European review.
In the months to come, the CEOs may have to decide whether divestitures or restrictions demanded by regulators amount to a substantial detriment to their respective companies. If so, either can back out, according to the merger deal.
In that situation, you would hope they're responsible managers of the shareholders' capital and would do what's in the best interest of the shareholders, said Chris Allen, analyst at Evercore Partners.
Barclays Capital, in a research note, said regulators could push for a business model in which rivals can more easily launch alternatives or even have better access to Deutsche Boerse-NYSE Euronext's clearinghouse -- outcomes that could crimp the combined company's trading and clearing fees.
Ironically, Chicago-based CME Group Inc's nascent push into European clearing and futures trading could help make the antitrust case for Deutsche Boerse and NYSE Euronext. And CME itself overcame a similar, albeit U.S., regulatory review when it bought the Chicago Board of Trade in 2007.
For now, NYSE Euronext shares are about 3.5 percent lower than the implied value of Deutsche Boerse's offer, suggesting a long but manageable road to completing the deal.
(Reporting by Jonathan Spicer; editing by John Wallace)