Deutsche Boerse AG's last-ditch lobbying efforts in support of its proposed takeover of NYSE Euronext look set to fail, leaving the deal heading for the rocks with European antitrust regulators expected to block the deal
Deutsche Boerse's Reto Francioni and NYSE Euronext Chief Executive Duncan Niederauer hope to salvage the deal by pressing the case for the merger with commissioners ahead of a February deadline in Brussels.
In a transcript of a video message to employees published on the Web site of the Securities and Exchange Commission on Wednesday, Niederauer said: Over the next few weeks we're going to continue to press our case directly with various Commissioners in the European Union, both to highlight the serious flaws in the case team's core argument, and to ensure that there is a clear understanding of the strong benefits that our combination will bring to a broad set of stakeholders in Europe.
Both Niederauer and Francioni will also seek to influence politicians and regulators at a visit to the World Economic Forum at the end of January, but analysts cast doubt on their prospects of success.
The commissioners have rarely voted against the case team's recommendation, so the probability of the deal going through now drops to 20 percent, UBS analyst Arnaud Gilbat said in a note on Wednesday.
A source told Reuters on Tuesday that European Commission antitrust chief Joaquin Almunia and his case team would recommend blocking a merger which would create the world's largest exchange operator.
The European Commission's Directorate General (DG) for competition on Wednesday declined to comment on its potential ruling, but Niederauer told his employees to expect bad news.
We have not received a formal decision from DG competition, but it certainly appears, if you look at all the news reports, that the preliminary conclusion they have reached will be to recommend that the proposed merger with DB be prohibited, the transcript said.
Niederauer said the case team's concerns could only be based on conclusions raised in a statement of objections, which Reuters was first to report in October last year.
Specifically their assertions are that the derivatives industry is not global and that the over-the-counter and exchange traded derivatives markets are not converging and therefore do not compete, Niederauer further said, according to the transcript.
I think that's the conclusion that results from a fundamentally flawed technical analysis that ignores the realities of the marketplace that we live and work in every day, Niederauer continued.
Deutsche Boerse and NYSE now plan to bypass the antitrust ruling and appeal directly to the so-called college of 27 commissioners, who are expected to meet early next month.
Niederauer said the benefits of a deal included 3 billion euros (2.49 billion pounds) in capital efficiencies for clients, and more than 2 billion euros in annual cost-savings for end users.
But Martin Peter, an analyst at LBBW, said, The boerse has underestimated Brussels. The chances of a successful deal are sinking by the day. I think it's quite unlikely that a majority of commissioners will outvote Almunia.
Deutsche Boerse cannot propose additional remedies to the European Commission but will instead seek to win political backing in Berlin from German chancellor Angela Merkel, in the hope that she may pressure commissioners in Brussels.
But this too will prove difficult said Simmy Grewal, analyst at Aite Group, The problem for Merkel is that if she uses political influence on this she's not going to be able to use it on something else.
This merger is not her highest priority at the moment and one might question whether it is prudent to go ahead with the deal given the amount of opposition among the Commissioners.
The head of trading at a large European investment bank in London said both exchange operators had not done enough to sway European regulators.
Brussels understands the competition issues but the concessions the exchanges offered were pathetic, the trader said.
Both exchanges have demonstrated classic monopolistic behaviour in their protection of their futures businesses and this is obvious from the fact that trading and clearing fees have fallen over recent years in all areas across Europe apart from exchange-traded futures, he added.
The college of commissioners will give a formal ruling by February 9.
The boerse is hoping to appeal to EU internal markets commissioner Michel Barnier, who is striving to regulate the $600 trillion over-the-counter derivatives market, which is exempt from stricter regulations including reporting requirements because it takes place off-exchange.
Deutsche Boerse is arguing that the merger of the Frankfurt Stock Exchange and the Eurex derivatives platform with the New York Stock Exchange and the Liffe derivatives exchange will create a bigger player in the so-called regulated market.
The exchange operators plan to raise the issue of how the European antitrust case team defined the derivatives market in coming to its decision, the first source said.
They plan to argue that any analysis of the impact on competition from their deal should look at the derivatives market as global rather than just European, and should include the over-the-counter market, the source said.
Yet Reuters was first to report last month that European Commission antitrust officials showed no sign of being swayed by last-ditch arguments to save the deal.
For the boerse there are few alternatives to the merger. The takeover of NYSE Euronext, announced in February last year, capped a wave of exchange merger plans globally, but most other proposed transactions, including bids by the LSE, Singapore Exchange Ltd and Nasdaq OMX Group have since failed.
Smaller acquisitions in eastern Europe or perhaps Spain may be an option, but a big deal such as the one with NYSE won't come along again, Equinet analyst Philipp Haessler said.
The European Commission has demanded Deutsche Boerse and NYSE sell either the Eurex derivatives arm or Liffe, a move that both exchanges have ruled out so far.
German union representatives on Wednesday said they would be pleased if the European authorities blocked the deal. We had feared there would be grave consequences for Frankfurt as a financial centre if the deal succeeded.
(Additional reporting by Luke Jeffs and Julien Toyer; Editing by David Holmes and Helen Massy-Beresford)