Citi | The London Stock Exchange and Deutsche Börse have provided this week some more detail about their proposed all-share merger. Targeted cost savings of €450m per annum, three years after completion, were announced and formed the most significant piece of new information.
The cost synergies vs. expectations.
We had anticipated that cost synergies of 10-15% might have been possible. This equated to €260 – €355m of the combined entity. LSE/DB1 announced savings of €450m, equating to 20%. It is clear that a lot of work has gone into identifying, and we think maximizing, potential synergies. These, we think, form DB1’s foremost bargaining chip when it comes to convincing shareholders of the merits of this deal. Future revisions to their offer, subject to outside interest from a rival exchange group, may be limited owing to various balance sheet considerations.
The ball is now in the interloper’s court
It is now up to ICE to make its full intentions known to the market. Assuming the successful completion of the LSE/DB1 merger, and assuming all cost synergies are extracted, we think the price today for the LSE is £31.50 – £33.30. The question thereafter is whether or not ICE has to pay that in order to be successful. Is a lower price today more attractive than a higher price in three years? We expect that synergies from an LSE/ICE combination would be less than the LSE/DB1 merger, albeit still significant. It is possible that cross-margining benefits would be lower with ICE Clear Europe, as well. However, it is important to note that we see any involvement from ICE as being in the form of a takeover, as opposed to a merger.
What is the pro-forma implied share price?
We set out our view of what the pro-forma combined entity might look like for LSE/DB1. We believe that a discounted per share value for the LSE, under the current proposal, is £31.50 – £33.30.