London exchange battle hots up

European stock exchange Euronext is among the front-runners to acquire Liffe, London's futures and options market, the Sunday Times reported.

According to the newspaper, Euronext, formed from the merger of the Paris, Brussels and Amsterdam exchanges, has already had talks with Liffe chairman Brian Williamson.

Liffe announced last week that it had received a number of approaches from possible buyers.

The only admitted bidder - and so far the clear favourite - is the London Stock Exchange (LSE).

The LSE has been under pressure to find a partner after the collapse of its planned merger with Frankfurt's Deutsche Boerse and the successful repelling of a hostile bid by Sweden's OM Group.

Euro hopes

Euronext has not yet admitted a concrete approach to Liffe, but has made no secret of its quest for further merger partners.

Euronext has plenty of cash to play with

The exchange, which was floated earlier this year, has about 1bn euros (£619m; $910m) to spend on international expansion.

Liffe is informally valued at £400m, putting it well within Euronext's price range.

But a takeover will not be simple, thanks to Liffe's unusual shareholder structure.

Liffe's shares are theoretically traded, but change hands very rarely.

Funds decide

Two US investment funds, Blackstone Group and Battery Ventures, hold a combined 30% stake thanks to a financing deal arranged last year.

The LSE remains the front-runner

They have an option to increase their stake to at least 36% by buying shares at £12 apiece - the price they reached after the LSE announcement on Friday.

Raising the stake will give the two funds effective control over who wins Liffe's hand.

Liffe, which is being advised by investment bank CSFB, is reportedly looking for a price of at least £15 per share.

Other runners

According to various newspaper reports on Sunday, Euronext is not alone in approaching Liffe.

The Chicago Mercantile Exchange, one of the biggest US markets for financial futures and options, is reportedly eyeing Liffe.

Nasdaq may have to postpone its flotation

And the Nasdaq exchange in New York, which has a joint venture with Liffe, is also in the running.

Nasdaq's fortunes have taken a hit in recent weeks, however, as the decline in trading volumes means it may be forced to postpone its flotation, planned for early next year.

The delayed flotation will mean that Nasdaq has far less money to fund international expansion.

Reviving Liffe

In the meantime, Liffe is making an effort to boost its business, by attracting individual investors into the futures and options market.

Companies use futures and options to hedge risk on financial, currency and commodity transactions, but individuals find them a dangerous and volatile investment.

The exchange is hoping to reduce investor nervousness by launching a new scheme on its website, which will allow retail investors to take part in simulated trading exercises, give details of the brokers, and explain the arcane world of derivatives.

Liffe has already signed up seven brokers to help market its services to private clients.

The exchange argues that futures and options allow investors to make money when prices go down - potentially a strong selling-point in current conditions.