No big deal for Deutsche Börse and NYSE

Nice try, but no dice. The European competition authority has effectively scuttled a planned $17bn merger between NYSE Euronext and Deutsche Börse, recommending the deal be blocked on antitrust concerns. That is a blow for both groups, which between them own the New York, Frankfurt and Paris stock exchanges. But investors shouldn't lose sleep over it.

The deal always looked like a long shot: The combined group would have an estimated 94% share of European derivatives trading. The exchanges claimed this was irrelevant since derivatives trading is a global business and most happens over the counter rather than on exchanges, but their argument was given short shrift. So, too, were their proposals to sell an equity-trading business, improve rivals' access to clearing services and freeze fees for two years.

Their best hope lay in the sale of one of either Eurex or Liffe, their prized derivatives-trading businesses. But neither was prepared to contemplate this step. The European Commission will make its final decision in February, but UBS now puts the deal's chances of success at 20%.

The deal's failure would be a relief for smaller rivals like the London Stock Exchange and ICAP and for some customers who were concerned about the group's pricing power, despite the promise of $3bn in savings on collateral. It would cap a spate of failed sector deals, including plans last year to merge the Canadian exchange and LSE, and exchanges in Australia and Singapore.

NYSE and Deutsche Börse will forfeit synergies with an estimated capitalized value of €1.9 billion ($2.43bn), and the prospect of a re-rating to the higher multiples enjoyed by more integrated trading and clearing groups. Still, their shares were already largely discounting the deal's failure—having reversed post-announcement gains of more than 10% on news of competition concerns last August—and were broadly flat on Wednesday.

But all isn't lost. Both groups now trade around 10 to 11 times forward earnings, well below the long-term average of 20 times for exchanges globally. Yet G-20 commitments to push standardized over-the-counter derivatives onto exchanges and European proposals to force more derivatives through clearing aren't yet reflected in earnings estimates. Their shares may have further to roll.

(Published by WSJ - January 12, 2012)