US embassy cable - 05PARIS381

UNCLAS SECTION 01 OF 02 PARIS 000381 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, FR, PBIO 
SUBJECT: EURONEXT BIDS ON THE LONDON STOCK EXCHANGE 
 
Ref:  (A) Paris 008800; (B) Frankfurt 10640 
 
1. SUMMARY.  Paris-based Euronext, the first cross-border 
European exchange, has launched talks to buy the London 
Stock Exchange (LSE), after the LSE rejected an informal 
approach from Deutsche Borse (DB, ref B).  If the bid is 
accepted, Euronext will realize its ambitions (ref A), 
becoming the biggest stock market operator in Europe, and 
the second biggest in the world after the NYSE.  Acquisition 
of LSE by DB or Euronext would favor a more integrated 
European securities market.  It would also confirm London, 
not Paris or Frankfurt, as the center of European financial 
operations, but could also boost the pro-euro camp in the UK 
and push the UK a bit closer to euro entry. END SUMMARY. 
 
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Euronext bids on the London Stock Exchange 
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2.  Euronext, which was formed by the merger of the stock 
exchanges of Paris, Brussels, and Amsterdam in September 
2000, with the Lisbon stock exchange in 2002, and the 
purchase of the London-based options and futures exchange 
LIFFE, launched a bid for the London Stock Exchange (LSE) 
just after LSE rejected a 2-billion euro offer from Deutsche 
Borse (DB). A Euronext official confirmed that the company 
has been working on a possible bid with its advisers Morgan 
Stanley, UBS, ABN Amro, and BNP-Paribas. 
 
3.  Euronext is working on an all-cash offer that is 
expected to come in above the 530 pence-a-share indicative 
offer (2 billion euros) made by DB on December 11 (ref B). 
The CEO of Euronext, Jean-Francois Theodore, held private 
talks with Clara Furse, his LSE counterpart to spell out his 
interest in making a bid. 
 
4.  Euronext, which is organized under Dutch law, will need 
approval from its shareholders to make its bid.  According 
to new Dutch regulations, the acquisition of a stake of more 
than 33% in a company requires the green light from 
shareholders.  Banks, which historically possess most of 
Euronext's shares, are not all favorable to the overtures to 
LSE.  According to press reports, DB has secured approval of 
a possible takeover from its supervisory board, although 
some of its shareholders are showing some resistance. 
 
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Euronext Advantages over DB 
--------------------------- 
 
5.  Euronext is already present in London due to its 
acquisition of Liffe in 2001.  Euronext also already has a 
foot in the door as the biggest individual shareholder (with 
a 41.5% stake) of LCH Clearnet, a merger of the London and 
Euronext clearing systems, and the first European clearing 
and central counter-party services provider.  Euronext 
claims it is the only European market that has successfully 
integrated its operations with that of others in other 
countries (NOTE:  DB's model is to place its trading screens 
in other countries - providing "cross border" access to its 
trading platform - a different business strategy than 
Euronext's, but still effectively cross border.  END NOTE). 
Perhaps most important, Euronext has signaled it is prepared 
to move its headquarters from Paris to London.  A Euronext 
official said "Sitting in London is likely to win favor from 
the LSE's customers, its board, politicians and the 
Financial Services Authority." 
 
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Stakes are High for Euronext 
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6.  French analysts have noted that in not making a bid for 
LSE, Euronext would miss the opportunity of getting its 
hands on the largest liquidity pool in Europe.  A deal with 
LSE would have an immediate impact for Euronext, since LSE 
is Europe's biggest stock market with a total 2.1 trillion 
euro capitalization.  A deal with LSE would offer issuers 
and investors access to more liquidity, reduced costs and 
more efficiency.  If Euronext's bid is rejected, it could 
also find itself deprived of LCH Clearnet income, and lose 
equity derivatives market share. 
 
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Other Fish in the Sea 
--------------------- 
 
7.  If Euronext is set on expansion, it could simply choose 
a strategy to develop further computerized services. 
Another possibility would be to associate, acquire or merge 
with southern or east European stock exchanges.  According 
to financial industry insiders, Euronext has been in talks 
to buy pan-European bond trading platform MTS Group.  London- 
based EuroMTS, which is part of the Milan-based MTS group, 
handles more than 50% of euro-zone government bond trading. 
Euronext officials have refused to comment, except to say 
that there is no link between the MTS rumors and talks with 
the LSE.  In 2004, the MTS group was looking for a partner 
able to give it the financial means to accelerate its 
development.  The acquisition of MTS by Euronext would be 
expensive (MTS posted 70 million euro sales and a high rate 
of growth in 2004), depriving Euronext of funds it might 
need to acquire LSE.  Nevertheless, Euronext could reinforce 
its position on the European government bond market if it 
acquires the MTS platform. 
 
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LSE Waits and Sees, Ready to Examine Proposals 
--------------------------------------------- - 
 
8.  LSE said it plans to continue its negotiations with 
suitors as "the approach is an early stage and therefore 
does not require a response at this point."  According to 
the Financial Times, "the decision is likely to come down to 
personalities and strategic direction - plans to offer 
derivatives trading alongside equities trading."   Euronext 
could officially confirm its bid in early 2005 as its 
advisers are sounding out LSE's customers to ensure they are 
comfortable with the structure. 
 
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Comment 
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9.  A deal with either DB or Euronext will create the 
biggest stock market operator in Europe, and the second 
biggest after the NYSE.  Consolidation of share trading will 
have significant implications for integrating European 
securities markets (ref B).  If Euronext's proposal is 
accepted by LSE, Euronext could realize its grand ambitions 
(ref A), but London would realize the mixed impact of 
maintaining its presence as the key European financial 
center while becoming more integrated into the EU fold and 
thus less independent. 
 
10.  This message has been coordinated with and cleared by 
Embassy London and the Financial Attache, Frankfurt. 
WOLFF