Breakingviews-CME-DB deal is both justifiable and unlikely

Tue Feb 26, 2013 5:52pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Quentin Webb

LONDON, Feb 26 (Reuters Breakingviews) - A $32 billion union between CME Group (CME.O) and Deutsche Boerse AG (DB1Gn.DE) is logical - and unlikely.

Bloomberg reports that the American CME recently made overtures about creating a global futures powerhouse. The German group doesn’t deny receiving an approach, but says it is not holding “merger negotiations”. Still, the appeal to CME is clear.

Bourses spend heavily on technology, so joining forces means major cost cuts. The overlap is imperfect, since Deutsche Boerse is big in cash equities, unlike CME. But Berenberg says annual synergies could still reach about $200 million, worth about $1.3 billion taxed and capitalised, Breakingviews estimates. CME could stop building its own London derivatives market. And the combined group would be more attractive to potential Asian business or merger partners.

In 2012 Brussels vetoed a NYSE Euronext NYX.N deal with Deutsche Boerse. But CME-DB’s antitrust problems might be surmountable. With NYSE, the European Commission had feared a combined stranglehold in European interest-rate derivatives - and, importantly, judged the U.S.-focused CME a bit-player. Adopting the same market-by-market focus could allow this deal through.

Nonetheless, many things could get in the way of a deal. Banks will not like the prospect of one group handling 60 percent of global listed interest-rate derivatives. They might prompt regulators to think more holistically. And, politics, often a deal-killer for exchanges, are a problem. CME and Deutsche Boerse are important fixtures in Chicago and Frankfurt respectively, and neither city wants to lose jobs or prestige.

The biggest obstacle, however, could be Deutsche Boerse itself. It would be the smaller partner by earnings and, especially, by market value, since CME enjoys a premium rating. So CME investors would have the majority of a combined group in a presumably share-based deal. There would probably be fewer posts for the Frankfurt company’s managers, and Chicago would be the obvious headquarters.

But unlike NYSE, which recently sold itself to ICE (ICE.N), Deutsche Boerse has no pressing reason to cede its independence. And it can point out that exchange mergers often end in time-consuming, costly failure. So it looks unlikely to accept anything less than a knockout bid.

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CONTEXT NEWS

- On Feb. 25 Deutsche Boerse said it was not in merger negotiations with CME Group, the U.S. exchange operator. The denial followed a report by Bloomberg, which said CME had approached the Frankfurt bourse to consider beginning talks on a merger.

- Citing people familiar with the situation, the newswire said CME made its approach late in 2012 but Deutsche Boerse - whose takeover of NYSE Euronext was blocked by European regulators last year - was hesitant about entering discussions. A merger would unite the biggest U.S. and European futures exchanges.

- Deutsche Boerse said its “primary strategic focus is on organic growth, mainly by expanding its business into growth regions in Asia, extending its services for unsecured and unregulated markets, and expanding its combined market data and IT business”.

- Bloomberg article link.reuters.com/dej36t

- Deutsche Boerse statement link.reuters.com/fej36t

- Reuters: D.Boerse denies CME talks, but some see logic of a deal [ID:nL6N0BP9PM]

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- For previous columns by the author, Reuters customers can click on [WEBB/]

(Editing by Edward Hadas and Sarah Bailey)

((quentin.webb@thomsonreuters.com))

((Reuters messaging: quentin.webb.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS DB/CME

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