Euronext looks like the underdog in the battle to acquire London Stock Exchange. On every financial measure, Deutsche Börse is between 80% and 100% bigger. The Frankfurt exchange also has cash of about e500 million, versus Euronext's e200 million. If Deutsche Börse offered £1.5 billion ($2.9 billion) in cash for the LSE, 600p a share, could Euronext stay in the game?
It could – but at a stretch. The French-led exchange would have to tap the bond markets for as much debt as possible. If Euronext wanted to retain a single A credit rating it could probably raise about £660 million, roughly 2.5 times its ebitda combined with the LSE's. Were it content to drop to BBB, it could raise even more – 3.5 times ebitda, £935 million. After allowing for £140 million cash, that still leaves a shortfall of £425 million to £700 million. Euronext would therefore have to tap its own shareholders. With a market cap of e2.7 billion that would be a lot – but possible.
However, there would be costs. If Euronext borrowed as much as it could, accepting the drop to BBB, its cost of funding would exceed Deutsche Börse's. And Euronext CEO Jean-François Théodore would have to persuade shareholders to stomach a big rights issue – especially if the proceeds were to pay a fat premium to LSE shareholders.
But he doesn't have many other options. Teaming up with another exchange probably won't bring sufficient firepower to see off Deutsche Börse chairman Werner Seifert. And it is hard to see a private-equity partner saving the day. A financial investor would be uncomfortable with a minority stake in a listed entity, especially if it had paid top dollar.
Reliance on equity funding does make it harder for Théodore to overpay. But can Euronext actually justify a higher price than Deutsche Börse? Commentators suggest it could wring more synergy from a deal than the Germans. But it's not clear that this is so. Most of the value creation would come from merging technology platforms. The contenders are probably neck and neck on this.
None of this means Euronext won't try hard to come up with a juicy bid. Even if it can't beat Deutsche Börse, it will certainly want to push up the price the Germans end up paying. Théodore's main problem is time. Not only did Seifert get his move in first, in theory he could slap down a cheque tomorrow. But speed might not turn out to be such a big advantage. The LSE is likely to play for time to get an auction started. Its initial rejection of Deutsche Börse's offer – on grounds of regulatory uncertainty – suggests it is already procrastinating hard.