The London Stock Exchange (LSE) is confident of winning shareholder support for its 1.6 billion euro ($2.2 billion) takeover of Borsa Italiana, it said on Monday, despite a mixed reception to the deal.
LSE shares fell as much as 8 percent in early trade, amid speculation its biggest shareholder, U.S. rival Nasdaq, might oppose the all-share deal, or might abandon its interest in a bid for the LSE and sell its 30 percent stake.
Some analysts also said the LSE was paying a high price to strengthen its position as Europe's biggest stock market.
But LSE Chief Executive Clara Furse said she had spoken to shareholders and was confident of more than sufficient support to complete the takeover.
By 1215 GMT, LSE shares had pared their losses to trade down 0.5 percent at 1,348 pence.
Buying Borsa Italiana will help the LSE diversify from cash equities trading, where it makes the bulk of its revenues.
Borsa Italiana is in the process of taking a controlling interest in MTS, Europe's main electronic bond trading platform, by exercising its option to buy a stake currently held by NYSE Euronext, the world's biggest stock exchange group.
It's a wonderful diversification story for the London Stock Exchange, Furse told analysts on a conference call.
She added the LSE would remain open to potential partners.
We expect to be attractive to other parties, she told a news conference in Milan. We become increasingly attractive (with this deal). We are open to opportunities going forward as we have always been.
But some analysts said the deal would do little to boost the LSE in a global dash for consolidation among trading exchanges.
It still looks horribly isolated in terms of global penetration, said David Buik at spread-betters Cantor Index.
Others questioned whether the LSE would get the 50.1 percent of shareholder support needed for the deal, with many investors believed to be holding out for Nasdaq to make a fresh takeover attempt next year after its last bid failed in February.
We believe LSE may find it difficult to gain sufficient shareholder approval given Nasdaq's stake, analysts at Keefe, Bruyette & Woods (KBW) said in a research note.
Nasdaq was not immediately available for comment.
The KBW analysts said the deal looked expensive at 27 times Borsa Italiana's earnings for 2006, versus the LSE's market valuation of 23.4 times earnings in the year to March 2007 and a sector average for European exchanges of 26.2.
Credit Suisse analysts, however, said the price looked good and raised their price target on LSE shares to 13 pounds from 12 pounds, on the LSE's forecast for 40 million pounds of synergy savings and a 10 percent boost to earnings in fiscal 2009.
SCRAMBLING FOR PARTNERS
Trading exchanges are rushing to find partners as they look for global reach and for economies of scale that will allow them to meet customer pressure to cut fees.
They also face competition from Project Turquoise, a group of investment banks seeking to set up their own pan-European equities trading platform later this year.
Borsa Italiana said it had agreed the deal with the LSE over alternative propositions. Sources familiar with the matter said last week it had also been approached by NYSE Euronext.
Borsa Italiana Chief Executive Massimo Capuano brushed off potential obstacles to the deal, saying there was no doubt over the legality of its option to buy NYSE Euronext's stake in
This followed a report in the Financial Times that NYSE Euronext was looking closely at the legal terms of the option.
Other newspaper reports said Britain's Icap, the world's biggest inter-dealer broker, was keen to buy MTS.
We do not want to sell MTS, Capuano told reporters.
Icap declined to comment.
The Daily Telegraph reported, without citing sources, that Nordic stock exchange OMX was in advanced talks to be the sole technology provider to Project Turquoise.
This could put Nasdaq in direct competition with LSE, as it in the midst of a $3.7 billion takeover of OMX.
OMX declined to comment.
Borsa Italiana is mainly owned by banks and financial firms. Its largest shareholders are Unicredit, with a 19.9 percent stake, and Intesa Sanpaolo (ISP.MI: Quote, Profile, Research) with 18.7 percent.
LSE is being advised by Merrill Lynch and Lehman Brothers, while Morgan Stanley and Mediobanca are acting for Borsa Italiana.