Brexit Or Not, 28th February 2016


In recent weeks two globally important merger/takeovers have been announced and escaped the attention they deserve amongst the noise of the Brexit debate. The first should certainly be good for the UK Financial Services Industry, whilst the second could have other far reaching consequences…

1) London Stock Exchange to merge with Deutsche Boerse?

The LSE has agreed to merge with Deutsche Boerse of Frankfurt and unless another bidder emerges by the early May deadline, this will happen, and with the German exchange having the controlling share.

Xavier Rolet, the Chief Executive of the LSE has masterminded sixteen acquisitions over the last seven years and has huge respect for his German counterpart, Carsten Kengeter. The root logic behind the deal is that Rolet has always wanted the LSE to be part of perhaps, only three or four exchanges that will be truly global, rather than predominantly domestic. So, whether we vote to stay in the European Union or head for the exit, this deal will still probably go ahead.

Seven years ago, Deutsche Boerse was five times the size of the LSE but after all the activity of recent times, this would be a merger of almost equals, in terms of size. In all probability, this is the best timing and best deal that could be accomplished and will be central to London’s continuing existence as a global participant.

As Rolet points out, being $5 billion or even $10 billion in size means being almost invisible on a world stage, whereas he believes that the merged entity will grow from a current value of $30 billion to $50 billion in a few years’ time. This is just as well, because when the Shanghai Stock Exchange demutualises, it will be worth $75 billion! So in this case, size does matter.

2) China Merchants Group joins race to buy the Baltic Exchange

Following on from the previous article, which commented on the massive size of the Shanghai Stock Exchange, a state run conglomerate in China has made an informal bid to buy London’s Baltic Exchange and coincidentally, China Merchants is also listed on the Shanghai Stock Exchange.

Just to remind ourselves of what the Baltic Exchange has been doing since its humble origins in a Threadneedle Street coffee house in 1744. As the world’s only independent source of maritime market information for the trading and settlement of physical and derivative shipping contracts, it has 600 members and is responsible for a large proportion of all dry cargo transported as well as the sale and purchase of merchant ships.

We have commented in previous Market Reviews on the level of the Baltic Dry Index. This index, one of many provided by the Exchange, is a measure of the demand for shipping capacity versus the actual supply of dry bulk carriers.

It is a crude, but simple reflection of the state of world trade and expected future flows of trade. Obviously, such an acquisition by the Chinese would give it ownership of the industry’s benchmark indices, the Baltic Dry Index being only one example.

It is the latest Chinese company to look at shipping and commodities targets in Europe, taking advantage of the market downturn that has pushed valuations down to very attractive levels.

China Merchants has not responded to repeated requests for comments, which should surprise no one, but watch this space as at least five other potential buyers have been reported by Reuters as being interested in acquiring the Baltic Exchange. Perhaps the Chinese might consider buying Starbucks or Costa Coffee, as it seems that at least half of the business in our industry is now conducted from such premises!