Deutsche Boerse and NYSE Euronext are expected to announce a deal to create the world's largest exchange operator later on Tuesday, but set aside thorny political issues that pose a challenge to its successful completion.
Highlighting how political concerns are weighing on a wave of consolidation sweeping the industry, Singapore Exchange tweaked its $7.9 billion bid for rival ASX to allow more Australian directors onto a combined board as it seeks to win the support of Australian lawmakers wary of ceding control of the local exchange.
Nationalism is one of the biggest hurdles to the industry mergers as exchanges are often seen as symbols of national pride and important to attracting business and capital. The deals, including a bid by the London Stock Exchange to take over Toronto Stock Exchange operator TMX Group, face intense scrutiny from regulators and politicians around the world.
A number of key details in the Deutsche Boerse and NYSE Euronext merger have been hammered out, sources said. A definitive agreement is expected to be announced on Tuesday, one source said.
But several difficult issues have yet to be addressed, which is likely to add to concerns being raised on both sides of the Atlantic.
Politics is also seen as the driver behind the revised SGX plan that gives an equal number of board seats to Australians and Singaporeans in the combined entity compared to less than half for the ASX under the earlier offer.
The bourses said in a joint statement on Tuesday there would also be three international directors although they would initially come from the SGX board. The size of the board has been whittled down from 15 to 13.
All the resistance to the deal has been political. The steps taken today should address some of those political issues, said Mark Nathan, portfolio manager at Arnhem Investments. It clearly carves out and maintains some sovereignty within Australia, and there should be a lot less resistance to the deal in its new form.
There is no change to the value of the SGX offer and ASX shareholders will still hold about 36 percent of the company under the new proposal.
Similar political and regulatory hurdles may threaten the Deutsche Boerse-NYSE Euronext tie-up.
The biggest question mark in general is obviously the European political and regulatory landscape coming out of this, one source said.
The Frankfurt- and New York-based companies were center stage in the merger frenzy that erupted last week and heated up on Monday as Brazil's BM&FBovespa said it was eyeing its own prospects and as traders buzzed that CME Group could jump into the fray.
Fox Business Network reported that CME Group, currently the world's top derivatives exchange group, may make a hostile bid for NYSE Euronext, citing bankers.
A spokesman for Chicago-based CME declined to comment. CME officials have been guiding investors away from expectations that the company would do a merger deal.
BM&FBovespa, the world's fourth-largest financial exchange operator, is closely looking out for tie-up opportunities, Chief Executive Edemir Pinto told Reuters. Pinto said China and India were markets where the bourse could pursue expansion.
The wave of consolidation activity sparked a rally in ASX shares last week, although the stock traded more than 10 percent below the value of the SGX bid, which indicated investors still had doubts about overcoming political obstacles.
Under the revised structure, key staff, infrastructure and bourse functions would be maintained in Australia. As with other deals in the sector, the ASX/SGX combination is designed to achieve greater economies of scale to attract new companies, products and traders while fending off competition from low-cost electronic rivals.
We believe despite the defensive nature of this deal the merger will position SGX in a stronger position to compete in a fast changing landscape, said Jaj Singh, a banking analyst in Singapore for UBS.
The take away here is that consolidation is inevitable as exchanges compete to become the trading platform of choice in their respective regions.
The deal still faces major political hurdles in Australia, with approval needed from parliament, where the ruling Labor party is in a minority so an agreement will need to win support on both sides of the aisle.
It's going to be very hard politically to get this one away...in a parliament with a majority of one, said Tom Elliott, managing director at MM&E Capital.
SGX shares fell 0.6 percent after coming off a trading halt on Tuesday. ASX shares, which were also under a trading halt initially, rose 1.7 percent.
Shares in Deutsche Boerse, which is expected to post a wider fourth-quarter loss later on Tuesday, were down 0.7 percent.
'SENSITIVE AND COMPLICATED'
Deutsche Boerse and NYSE have worked out details such as senior executives but the name and location of operations have proven sensitive and complicated, a source said, highlighting the difficulty in bringing together companies that are both operationally quite different and symbols of national pride.
The companies had previously announced that NYSE Euronext head Duncan Niederauer would head the combined company, Deutsche Boerse Chief Executive Reto Francioni would be chairman, and that the German company's shareholders would get about a 60 percent stake.
At a 60-40 ownership split, the majority of shareholders in a combined company would be from the United States, with 55 percent from the United States, 11 percent from Germany, 11 percent from the UK and 23 percent from the rest of the world, a source said.
The board of the combined company would reflect the ownership structure, with 10 of the 17 members coming from the German side, a source said, adding that the numbers include both Niederauer and Francioni.
(Additional reporting by Philipp Halstrick, Paritosh Bansal, Adrian Bathgate, Saeed Azhar and Narayanan Somasundaram; Editing by Balazs Koranyi and Muralikumar Anantharaman)