EURONEXT: WHAT'S BEHIND THE CONSOLIDATION OF EUROPEAN

UNCLAS SECTION 01 OF 03 PARIS 003447 SIPDIS SIPDIS PASS FEDERAL RESERVE PASS CEA STATE FOR EB and EUR/WE 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 SUBJECT: EURONEXT: WHAT'S BEHIND THE CONSOLIDATION OF EUROPEAN STOCK EXCHANGES ¶1. SUMMARY. EURONEXT, the Paris-based pan-European stock market that is poised to accept a merger offer from the NYSE, has been jockeying for a major merger operation for some time. EURONEXT's shareholders, the Paris financial community, and the French government all have an interest in maintaining the role of Paris as a major financial center. This cable examines those motives. END SUMMARY EURONEXT Leads Simultaneous Talks with Stock Exchanges -------------- -------------- ¶2. Over the past 18 months, Paris-based EURONEXT, formed by the merger of Paris, Brussels, Amsterdam, and Lisbon stock exchanges, has been involved in merger talks primarily aimed at consolidating the European stock exchanges. Last year, talks focused on merging or acquiring the London Stock Exchange. In the last few weeks, two major shareholders, New York-based Atticus and London-based TCI, have pushed for the merger of EURONEXT with Deutsche Borse (DB) the Frankfurt-based stock exchange. Atticus has significant stakes in EURONEXT, DB and NYSE. EURONEXT authorities have been open to all options, only in the last few days closing a deal with the New York Stock Exchange (NYSE). Euronext's chairman Jean-Francois Theodore said he would present all available options to shareholders at Euronext's May 23 annual general assembly. Euronext Shareholder Maneuverings -------------- ¶3. One shareholder, Winchfield Holdings NV, made a proposal to pressure EURONEXT to merge with DB. EURONEXT contacted its shareholders before May 23, urging them not to support the request. EURONEXT argued that a vote in favor of the DB option would hamper ongoing talks. Euronext also warned it lacked enough details and clarity on the project to make an informed decision. Two consulting agencies, Institutional Investors Services and Glass Lewis & Co, advised shareholders not to vote for the Winchfield Holdings resolution. ¶4. Twenty or so listed companies entered into a shareholders' pact to have a bigger say in the developments in EURONEXT's future. Orchestrated by Rothschild & Cie, the group includes large companies listed in the blue-chip CAC 40 (roughly the French equivalent to the Dow Jones Industrial Average or the S&P 500): Suez, Air Liquide, AXA, France Telecom, Schneider and Veolia Environment. The group, which held a 5% stake in EURONEXT, hoped to ensure a future with a European touch. ¶5. Separately, Societe Generale, BNP Paribas, Credit Agricole and Dexia joined the state-owned financial institution Caisse des Depots (a shareholder with a long history),to form another shareholder pact. The pact accounted for a 10.94% stake in Euronext and 11.06% of voting rights. Fortis, ABN AMRO and Banco Espirito Santo, which were involved in initial discussions, decided not to join the pact. Fortis even sold its "non strategic" 3.5% share in EURONEXT. That pact favors a large European market that would "increase liquidity and reduce costs for users within a safe and reliable system." That group did not want EURONEXT to be forced to adopt DB's vertical structure that includes post-trading services, including clearing and settlement, nor to have the new consolidated European stock exchange move its headquarters to Frankfurt. ¶6. On April 21, the company that owns the Dubai stock exchange, the Dubai International Financial Center (DIFC) confirmed it had acquired a 1.67% stake in EURONEXT. DIFC said on May 22 that it had raised it stake to 3.48%. DIFC commented that investment has been made "with the full knowledge and agreement of the board and management of EURONEXT." DFIC spokeman Charles Skeeles said "our investment in EURONEXT fits well with our long term strategy that consists in developing the Dubai center in addition of financial centers in Europe, in the U.S. and in Asia." EURONEXT Dubai and EURONEXT already had ties through a technical cooperation agreement involving Atos EURONEXT Market Solutions. Paris Financial Community Wants to Keep its Role -------------- --- ¶7. In April, Gerard Mestrallet, the Suez chairman and head of the Paris Europlace association, representing the major players in the financial market insisted "we are not opposed to a merger with DB, but conditions are not met." Europlace members are well aware that EURONEXT controls a sizeable portion of the French financial community. The community understandably fears Paris could lose its role as a financial center, since the proximity of a stock exchange historically has been crucial for growth of the financial sector. PARIS 00003447 002 OF 003 ¶8. The French securities regulator (AMF),Euroclear and the Association of Financial Economics ("Association d'Economie Financiere") expressed the same worries in a conference attended by post's local economist. Pierre de Lauzun, the general delegate of the French Association of Investment Companies (AFEI) said it was "necessary to be aware about the strong link between Paris Europlace (the financial community) and EURONEXT since the presence of a stock exchange has an impact on regulations." He also warned that vertical structure of a stock exchange "does not allow any flexibility," arguing that clearing might take place anywhere, while delivery and settlement requires harmonized regulations. Michel Didier, a member of the government "Conseil d'Analyse Economique" and also EURONEXT's scientific advisor, underlined that "proximity of a stock exchange was a source for efficiency for a financial center, and fit the logic of competitiveness poles." Professor Bertrand Jacquillat and Dominique Leblanc from FinInfo acknowledged that consolidation of stock exchanges was inevitable, but stressed that the "clustering" effect specific to a financial community was beneficial to all users. Michel Prada, the head of AMF, agreed preventive measures would be necessary. Businessmen Call the Government to Intervene -------------- ¶9. On April 27, Gerard de la Martiniere, the head of the Federation of Businessmen's Finance Commission ("Commission des Finances - MEDEF") stressed that international consolidation of stock exchanges was inevitable and desirable since "it will allow us to expand our financial resources and to reduce costs. However, we have to defend our interests to keep a geographical proximity with the stock exchange." MEDEF called on Finance Minister Breton to listen to the needs of a regulated market. MEDEF also joined Paris Europlace and the French Association of Private Companies to invite the European Commission to play a central role by examining "competition conditions as soon as possible" and the "consequences of a possible transatlantic merger, notably at the regulatory level." Separately, Belgian industry representatives emphasized the efficiency of the EURONEXT model that "allies economic advantages of an international stock exchange (scale savings, synergy of costs, and cross-border accessibility),maintains local identity, and allows developing capacity of local markets." Paris Europlace and the Ile-de-France Region Signs a Charter -------------- -------------- ¶10. Jean-Paul Huchon, President of the Ile-de-France region warned that "all countries that lost their financial industry declined" saying that the region, and Paris Europlace, were determined to protect and to reinforce its financial industry in order that "it remains a recognized financial reference at the European and worldwide levels." He indicated that the financial sector in Paris accounted for 15% of regional GDP and 6.8% of employment. French and German Government Views -------------- ¶11. Quizzed by the financial daily Les Echos, French Finance Ministry officials have said they "are vigilant, attentive to the Paris role. Many financial market participants have expressed their interest in EURONEXT. For sure, a merger with DB cannot be done at any cost." On April 30, Finance Minister Breton stated that he was in favor of federated structure, as a vertical structure of a stock exchange was not adapted to European integration. He said he would talk about this issue during the examination of the white book on financial services at the May 5 meeting of EU Finance Ministers. German Finance Minister Peter Streinbruck noted that "the capitalization of stock exchanges has to play a decisive role in a possible merger, and capitalization is a key factor in the selection of headquarters for the new consolidated stock exchange." It is worth noting that DB has greater market capitalization (12 billion euros) than EURONEXT (8 billion euros). ¶12. DB posted 257 million euro operating profit in the first quarter, up 45% compared with the same period in 2005, a performance much higher than that expected by analysts. Euronext announced that its first-quarter net profit has more than doubled, buoyed by strong trading in cash in Paris and derivatives markets on the LIFFE. Net profit in January-March was 107 million euros, up from 45.3 million euros in the same period of 2005. Comment -------------- ¶13. Although the merger with the NYSE is not what EURONEXT may have initially envisioned when thinking of European consolidation, it does fit into the interests of virtually all major French participants. EURONEXT's shareholders would benefit from the cash PARIS 00003447 003 OF 003 premium offered, and an opening into the U.S. markets. Even if Euronext headquarters moved to New York, the French financial community and the French government believe Paris will remain an important international financial center. Transatlantic regulatory supervision will, however, require a great deal of discussion. The likelihood of other possible merger/alliance options will be examined in a separate message. HOFMANN