Germans on brink of bid for Exchange

THE Deutsche Borse is poised to launch a bid for the London Stock Exchange as early as this week, sources at the Frankfurt exchange told Financial Mail last night.

An improvement on the indicative 530p-a-share cash proposal, plus assurances that London would be the financial centre, are likely to be the centrepiece of the offer.

But worries that Deutsche Borse might be about to overpay and that it would transfer staff to London mean its approach to the LSE has not been well received in Frankfurt, which aims to become Europe's main financial centre.

The speed at which the Borse is moving could come as a surprise to LSE staff who had been looking forward to a long Christmas break.

But an offer from the Germans will almost certainly trigger a counter-bid by the pan-European exchange, Euronext. Contrary to speculation, Euronext has been planning for this event for some time. Though it disclosed its advisory team only last week, UBS, the Swiss investment bank, Morgan Stanley and ABN Amro have been on Euronext's payroll for months.

Hopes that the race for the LSE will turn into a bidding war have driven shares in the exchange far above the Germans' 530p offer. The shares closed at 556p, a record high that values the London exchange at just over £1.4 billion.

Suggestions from the Deutsche Borse that Euronext does not have the financial firepower to match its indicative £1.3 billion offer have also been dismissed by Euronext.

Its chief executive, Jean-Francois Theodore, believes that users of the LSE who control 25 per cent of the company are key to the bid battle. Most of them are thought to be more comfortable with the Euronext model of business.

A formal bid from the Deutsche Borse will have to address British concerns over the clearing and settlement systems used in any merged exchange. Such concerns could make or break a deal.

These systems make sure that buyers and sellers of equities have the shares or cash to carry out their deals and that the rightful owners benefit. It is popularly referred to in the Square Mile as the 'City's plumbing'. The clearing and settlement for share trades in London are handled by two independent businesses, LCH.Clearnet and Euroclear, both of which are independent of any exchange.

But in Germany, these vital roles are carried out by the Deutsche Borse itself through subsidiary companies.

To win support from UK customers of the LSE, Deutsche Borse is expected to promise it would not impose its clearing and settlement services on London.

It could also agree to allow the rival clearing and settlement services to compete in Germany.