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Last Updated: Monday, 20 December 2004, 15:18 GMT
Market merger would boost Euronext
Bill Wilson
BBC News business reporter

Euronext's Bourse in Paris
LSE trades are cleared via Clearnet, in which Euronext has a 25% stake

Euronext, which has emerged as a potential bidder for the London Stock Exchange, is an ambitious and fast-growing company.

Founded in September 2000 through the merger of the Amsterdam, Brussels and Paris stock exchanges, Euronext has since gone on to make a number of high profile takeovers.

Most prominently, these include the purchase of the Lisbon Stock Exchange in 2001, and the London-based international derivatives market Liffe in 2002.

Now, however, it appears an approach for the LSE may be as much a matter of necessity as choice.

In not making a bid for LSE, the pan-European exchange would miss the opportunity of getting its hands on the largest liquidity pool in Europe
Societe Generale Group

Not only does Euronext appear to need fresh wind in its sails, it also cannot afford to stand back without a fight and allow Deutsche Boerse to leapfrog it in the European stakes.

At the moment, according to the International Federation of Stock Exchanges, Euronext is the world's fifth-largest exchange in terms of the total capitalisation of its quoted companies, valued at $2.2 trillion.

Deutsche Boerse in comparison is valued at $1 trillion, with the LSE valued at $2.6 trillion.

'Disappointing market'

Two weeks ago Euronext released third quarter results showing net profits of 22.4m euros (15.4m; $30m), and said it expected 2004 sales of 880m euros.

However, at the same time it revealed net profit "in a disappointing European market" for the first nine months of 2004 was 102m euros, compared with 106.8m euros in the same period last year.

And, looking ahead to 2005, Euronext said it expected only moderate revenue growth, after the rollout of a new tariff structure for cash markets and for interest-rate derivatives products next year.

In a report following the publication of the figures, French bank Societe Generale Group observed that the performance of Euronext shares had been "unexciting for a while".

It said the share price had been largely sustained by share buybacks and went on to warn "now the company has nearly reached its 10% target, we feel the share could lack support in the medium term".

And it said that given the prospect of a bidders' war between Euronext and Deutsche Boerse for LSE, the share price of both rivals "could be weakened".

Exchange links

However, despite this risk, the French bank's analysts warned that the alternative for Euronext, standing alone, could mean just 5% revenue growth in 2005, and no growth in 2006.

"Euronext has always recognised it is interested in LSE as both market models are similar and links between the two exchanges would be facilitated by the fact that they already have in common the post-trading activities," it said.

"In not making a bid for LSE, the pan-European exchange would miss the opportunity of getting its hands on the largest liquidity pool in Europe, and could also find itself deprived of its share of Clearnet's net income."

Trades on the LSE are cleared via Clearnet, in which Euronext has a quarter stake.

And that, despite Euronext's image as a modern model of pan-European integration, may be of prime importance.

Euronext describes itself as a Dutch business with its registered office located in Amsterdam, but is actually headquartered in the French capital, and also listed on the Paris Bourse.

But, perhaps more importantly, in any takeover battle with Deutsche Boerse it also already has that UK presence, unlike its German rival.

David Buik, at Cantor Index, says he believes there are more synergies for the LSE in an approach from Euronext, than from Deutsche Boerse.

'Bid competition'

A marriage with the LSE would also give Euronext access to Europe's largest exchange in terms of transactions.

The average daily volume of trade on Euronext has been 6.07bn euros ($8.1bn; 4.17bn) since the start of the year. On the LSE the comparable figure is 22.5bn euros ($30.2bn; 15.5bn)

A merger would see Euronext become the leading European exchange in terms of listed company capitalization.

But whatever its exact nationality, there is no denying both Euronext's popularity and clout - some 1,400 companies are now listed across its portfolio of stock exchanges, which have common trading rules.

Euronext operates exchanges in Paris, Amsterdam, Brussels and Lisbon
Euronext's catchphrase is 'go for growth'

While analysts said Euronext's interest in the LSE appears genuine, many predict that Deutsche Boerse should win any bidding war due to its deeper pockets.

Yet others add that Euronext could beat its German rival if it goes for broke.

"The best thing for Euronext to do would be to outbid Deutsche Boerse before selling it onto the Germans at an even higher price in three or four years time," said one London-based analyst who asked not to be named.

"Yet Euronext is certainly ambitious and into 'empire-building', so you never know, they may be bidding with the aim of adding the LSE to their business for the long term.

"It does like to grow the company."

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