By Ludwig Burger and Andreas Kröner
FRANKFURT (Reuters) - Deutsche Boerse (DE:DB1Gn) and the London Stock Exchange (L:LSE) are making a third attempt at a merger that would create a European trading powerhouse that could better compete against U.S. rivals encroaching on their turf.
The deal would combine the LSE's share-trading operation with the derivatives trading of Deutsche Boerse's Eurex in a group worth almost $30 billion (£21.3 billion). It would propel the companies to a similar scale as U.S. exchange ICE (N:ICE), which has taken a huge slice of the European derivatives markets.
Nearly 16 years after their first attempt to merge, the London and Frankfurt exchanges confirmed they were holding detailed discussions on an all-share merger that would give Deutsche Boerse shareholders a 54.4 percent stake and LSE shareholders 45.6 percent of a new company.
Two sources familiar with the matter told Reuters earlier the two were exploring a possible merger. One said the talks, using code names Delta for Deutsche Boerse and Luna for the LSE, were at an early stage.
"There can be no certainty that any transaction will occur," said the LSE, whose boss, Frenchman Xavier Rolet, has long sought a strong presence in derivatives - a major growth area.
Under British takeover rules, Deutsche Boerse must either make an offer or announce it will not do so by March 22, unless it obtains an extension from the UK mergers regulator.
Shares in both exchange operators, as well as others, jumped on the news, with LSE shares up 15 percent and Deutsche Boerse up 4.5 percent by 1537 GMT. Euronext (PA:ENX) shares were up 4.8 percent and Spanish exchange operator BME stock (MC:BME) rose 2.3 percent.
Deutsche Boerse had a market value of $16.4 billion as of Monday's close, while the LSE's was $11.6 billion, according to Reuters data.
PREVIOUS ATTEMPTS
A merger would create a group that spans derivatives, shares and indices - offering pan-European trading, clearing and settlement under one roof.
LSE owns LCH.Clearnet, one of the region's biggest clearing houses for euro-denominated securities, while Deutsche Boerse owns Clearstream, one of Europe's biggest settlement houses.
Deutsche Boerse, headed by CEO Carsten Kengeter, also owns Stoxx indices, the most traded stocks futures in Europe, while the LSE owns the UK's FTSE and U.S. Russell suite of indices.
Since their failed merger attempts in 2000 and 2004-5, neither the LSE nor Deutsche Boerse has been able to pull off a deal that transforms them into the dominant European bourse.
ICE, which owns the New York Stock Exchange, has meanwhile bought London derivatives trading platform LIFFE - presenting the two European firms with strong transatlantic competition.
U.S derivatives giant CME (O:CME) has also made inroads into the European market, while Chi-X - now owned by American BATS - has entered the fray to become Europe's biggest cross-border stock trading venue.
BREXIT WORRY?
Jonathan W Goslin, analyst at Numis Securities, said a deal should bring significant cost and revenue savings but said there were several hurdles to get past before it could go ahead.
Competition concerns and the exchanges' differing views on how to structure their businesses are possible obstacles, as well as national pride.
"Would the UK politicians be happy with the main UK exchange being owned by a foreign entity?" he asked.
One person familiar with the matter said such a merger would function even in the event of Britain deciding to leave the EU in a June 23 referendum, a so-called Brexit.
"They have a large business in continental Europe and a dynamic capital market on the Anglo-Saxon side. That's an attractive combination, Brexit or no Brexit," the person said.
EU rules form the basis for cross-border trading in the 28-country bloc with London the largest financial centre.
Mark Garnier, a pro-EU lawmaker for Britain's ruling Conservative Party, said the proposed deal was bound to play into the UK referendum debate.
"The average punter I have no doubt will look at this and say it is the Germans taking over our institutions," he said.