EURONEXT BIDS ON THE LONDON STOCK EXCHANGE

UNCLAS SECTION 01 OF 02 PARIS 000381

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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
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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
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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
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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