Euronext NV
09 February 2005
Not for release, publication or distribution, in whole or in part, IN, into or
from Australia, Canada, Japan OR the United States of america
9th February, 2005
EURONEXT ANNOUNCES KEY ELEMENTS OF POTENTIAL PROPOSAL TO ACQUIRE LONDON STOCK
EXCHANGE
Details of synergies, proposal to users, and important corporate governance
information
Introduction
Euronext N.V. ('Euronext') announced on 20th December, 2004 that it was
considering making a cash offer for London Stock Exchange plc ('LSE') and
seeking a recommendation from the LSE Board. Since that date, there has been a
series of productive meetings and discussions with the Board, the management of,
and advisers to, LSE. During these meetings, Euronext and LSE presented their
respective views on their businesses, discussed the key aspects of a combination
of these two important exchange groups and shared views on the future growth and
vision of a new, combined group. Euronext publicly reconfirmed its interest in
a possible cash offer on 27th January, 2005 and submitted a filing to the Office
of Fair Trading on 28th January, 2005.
Whilst its discussions with LSE are continuing, following the announcement on
27th January, 2005 by Deutsche Borse AG of a proposed preconditional unsolicited
cash offer for LSE, which has been rejected by the Board of LSE, Euronext, with
the authorisation of its Supervisory Board, today publishes key aspects of its
potential proposal to combine the businesses of Euronext and LSE in order to
facilitate detailed discussions with shareholders, users and regulators.
Following such discussions and prior to making any offer, Euronext reserves the
right to amend any or all elements of the potential proposals set out herein.
Summary
• Euronext created the first fully-integrated, cross-border cash and
derivatives exchange in Europe. Euronext is an international company with a
multinational board and management. It has a track record of successfully
integrating cross-border businesses, migrating IT platforms and delivering
revenue accretion.
• Euronext and LSE are natural partners, sharing a pro-competitive,
horizontal, technology-led business model. Euronext is convinced that a
combination with LSE would create the European leader with global potential that
exceeds that of any other potential combination.
• Euronext believes that a combination with LSE will generate total
annual pre-tax cost and revenue synergies of €203 million:
- €152 million of annual cost synergies achieved in the second year
after completion, in particular reflecting economies of scale in cash trading
and overlapping physical presence in London, of which €94 million relate to IT
(cash trading to be migrated to a single system following a user consultation
process); and
- €51 million of annual revenue synergies achieved in the third year
after completion reflecting, in particular, the unique opportunity of combined
Euronext.liffe/LSE ownership.
• Total restructuring and revenue investment costs are estimated at €184
million, and revenue dis-synergies are estimated at €20 million.
• Euronext has a strong track record of sharing efficiencies with users.
The combination would provide immediate benefits to the users of LSE:
- 10% overall reduction in current tariffs for UK cash trading on
central order book with a commitment to continued reductions; and
- 10% reduction in information services fees for customers subscribing
to a combined data package.
• Euronext will continue to offer transparent and efficient trading with
open post-trade architecture.
• The combined group will adopt a unitary single tier board structure
consistent with accepted UK practice and the highest international corporate
governance standards, including the Combined Code. The Board will comprise 12
non-executives, including an independent chairman and deputy chairman and user
representatives, and four executives (CEO, CFO, CEO cash and listing and CEO
derivatives).
• LSE, like LIFFE, will have a separate, independent board with an
independent Chairman. Approximately half of the non-executives will represent
users. Three user consultative committees will be formed.
• Euronext has significant experience working with multiple regulators
and specifically, through the acquisition of LIFFE, has a proven track record in
the UK.
• LSE would continue to be a Recognised Investment Exchange ('RIE')
regulated solely by the FSA and Euronext would provide a solid long-term
commitment that LSE would remain a UK RIE. Euronext believes its proposed
structure should meet FSA requirements.
• Euronext would seek a dual primary listing for its shares in London
and Paris.
• Euronext will maintain its commitment to shareholder value which has
been established through its progressive dividend policy, buy-back programmes
and strong EPS growth. Euronext will focus on its shareholders' objectives of
value creation, return on investment, earnings accretion and strong cash flow.
• Euronext has agreed in principle debt financing with a syndicate of
eight international banks.
• Euronext will discuss the contents of this announcement with key
constituencies: shareholders (of both Euronext and LSE), users and regulators.
Jean-Francois Theodore, CEO of Euronext, commented:
'Euronext had the original vision to address the fragmentation of European
national markets by creating the first fully-integrated, cross-border cash and
derivatives exchange in Europe. Following the successful harmonisation of cash
and derivatives systems across our domestic markets, we are now focused on
extending the benefits of our model to a global level.
We have long considered that a combination between Euronext and LSE would
represent a major consolidation for European markets and create the platform for
the leading global exchange for the future. We are convinced that Euronext and
LSE can together create significant additional value for shareholders and users,
and we are today making public important details of our proposal which we
believe demonstrate the positive differentiation between us and any other
potential combination.'
This summary should be read in conjunction with the full text of the attached
announcement.
Enquiries:
EUronext
Antoinette Darpy (Press Enquiries) Telephone: +33 1 49 27 53 75
Serge Harry (Investor Relations) Telephone: +33 1 49 27 14 94
bRUNSWICK (Press Enquiries) Telephone: +44 20 7404 5959
Kevin Byram
Andrew Garfield
ABN AMRO Telephone: +33 1 56 21 90 90
Pierre Fleuriot
morgan stanley & CO. LIMITED Telephone: +44 20 7425 5000
Caroline Silver
UBS Telephone: +44 20 7567 8000
Alistair Defriez
An interview with Jean-Francois Theodore, Chief Executive of Euronext, is
available on www.euronext.com and www.cantos.com in video, audio and transcript.
A conference call for analysts and investors will be held at 0900 GMT (1000 CET)
on the following number +44 (0) 1452 541077.
A press conference will be held at the offices of Euronext.liffe, Cousin Lane,
Canon Bridge, London, EC4R 3XX at 1045 GMT (1145 CET). Should you be unable to
attend this press conference in person a dial-in facility is available on the
following number +44 (0) 1452 541076.
ABN AMRO, Morgan Stanley & Co. Limited and UBS are acting for Euronext and no
one else in connection with the potential transaction and will not be
responsible to anyone other than Euronext for providing the protections afforded
to their respective clients or for providing any advice in connection with the
potential transaction.
The information contained in this announcement does not constitute an offer or
an invitation to purchase any securities of the London Stock Exchange plc and
there can be no assurance at this stage that any offer will be made.
Each of ABN AMRO, Morgan Stanley & Co. Limited, KPMG and the members of the
financing syndicate has consented to the use of its name in the form and context
in which it appears.
It is possible that this announcement could or may contain forward looking
statements that are based on current expectations or beliefs, as well as
assumptions about future events. Undue reliance should not be placed on any
such statements because, by their very nature, they are subject to known and
unknown risks and uncertainties and can be affected by other factors that could
cause actual results, and Euronext's plans and objectives, to differ materially
from those expressed or implied in the forward looking statements.
There are several factors which could cause actual results to differ materially
from those expressed or implied in forward looking statements. Among the
factors that could cause actual results to differ materially from those
described in the forward looking statements are Euronext's ability successfully
to combine the businesses of Euronext and LSE and to realise expected synergies
from that combination, changes in the global, political, economic, business,
competitive, market and regulatory forces, future exchange and interest rates,
changes in tax rates and future business combinations or dispositions.
Euronext undertakes no obligation to revise or update any forward looking
statement contained in this announcement, regardless of whether those statements
are affected as a result of new information, future events or otherwise.
No statement in this announcement is intended to be a profit forecast and no
statement in this announcement should be interpreted to mean that earnings per
share of Euronext for the current or future financial years would necessarily
match or exceed the historical published earnings per share of Euronext.
Not for release, publication or distribution, in whole or in part, IN, into or
from Australia, Canada, Japan OR the United States of america
9th February, 2005
EURONEXT ANNOUNCES KEY ELEMENTS OF POTENTIAL PROPOSAL TO ACQUIRE LONDON STOCK
EXCHANGE
Details of synergies, proposal to users, and important corporate governance
information
Introduction
Euronext N.V. ('Euronext') announced on 20th December, 2004 that it was
considering making a cash offer for London Stock Exchange plc ('LSE') and
seeking a recommendation from the LSE Board. Since that date, there has been a
series of productive meetings and discussions with the Board, the management of,
and advisers to, LSE. During these meetings, Euronext and LSE presented their
respective views on their businesses, discussed the key aspects of a combination
of these two important exchange groups and shared views on the future growth and
vision of a new, combined group. Euronext publicly reconfirmed its interest in
a possible cash offer on 27th January, 2005 and submitted a filing to the Office
of Fair Trading on 28th January, 2005.
Whilst its discussions with LSE are continuing, following the announcement on
27th January, 2005 by Deutsche Borse AG of a proposed preconditional unsolicited
cash offer for LSE, which has been rejected by the Board of LSE, Euronext, with
the authorisation of its Supervisory Board, today publishes key aspects of its
potential proposal to combine the businesses of Euronext and LSE in order to
facilitate detailed discussions with shareholders, users and regulators.
Following such discussions and prior to making any offer, Euronext reserves the
right to amend any or all elements of the potential proposals set out herein.
Jean-Francois Theodore, CEO of Euronext, commented:
'Euronext had the original vision to address the fragmentation of European
national markets by creating the first fully-integrated, cross-border cash and
derivatives exchange in Europe. Following the successful harmonisation of cash
and derivatives systems across our domestic markets, we are now focused on
extending the benefits of our model to a global level.
We have long considered that a combination between Euronext and LSE would
represent a major consolidation for European markets and create the platform for
the leading global exchange for the future. We are convinced that Euronext and
LSE can together create significant additional value for shareholders and users,
and we are today making public important details of our proposal which we
believe demonstrate the positive differentiation between us and any other
potential combination.'
A. BACKGROUND TO AND VISION FOR A COMBINATION WITH THE LSE
1. Creation of Euronext Group
In September 2000, Euronext united the exchanges of Amsterdam, Brussels and
Paris to create the first fully-integrated, cross-border cash and derivatives
exchange in Europe.
Euronext's vision was to create a specific framework to improve the efficiency
of the fragmented European capital markets. Euronext's model, which combines a
pan-European approach with a strong local presence, was designed to facilitate
further European expansion and growth based on the following principles:
• Creation of a single pool of liquidity across the member markets with
a single order book, increasing efficiency for users and reducing the cost of
capital for issuers;
• Technological innovation through the creation of single IT platforms
across the cash and derivatives markets of the founding exchanges;
• Harmonisation of trading rules across markets;
• Unchanged local regulatory status of each market;
• Local market access for issuers, investors and brokers;
• Promotion of competition through the implementation of a horizontal
model with equal and open access to post-trade infrastructure (clearing and
settlement services); and
• Active participation in the consolidation of the exchange industry.
In 2002, the Portuguese Stock Exchange (BVLP) joined the Euronext group and
Euronext acquired LIFFE. By October 2001, Euronext had completed the
harmonisation of the cash trading systems across the three founding exchanges
with Portugal completed by November 2003. By November 2004, Euronext had
successfully migrated all of its derivatives trading systems onto a single
platform. These cross-border mergers have contributed to the creation of a
single cash trading platform across four countries which in 2004 handled around
67 million trades on the electronic order book. This is more than any other
European exchange and some twice as much as either LSE or Deutsche Borse
individually.
Euronext has successfully achieved the first stage of its development. There is
now the opportunity to extend this vision to a global dimension and through the
combination with LSE to create the leading global exchange for the future.
2. Euronext and LSE share a common business model
Euronext and LSE share a common business view and model. Both groups support
post-trade freedom of choice, which Euronext believes is best effected by the
independence of clearing and settlement from exchanges, a process which Euronext
prosecuted through the creation of LCH.Clearnet. Euronext and LSE further share
a common vision of enhancing market liquidity, seeking international
development, and importantly, respecting market culture.
Critically:
• Euronext and LSE each has trading at the heart of its business, with
each having built its reputation and brand on cash trading business, and
successfully used those brands, particularly in the case of the LSE, to generate
additional revenue streams;
• Both Euronext and LSE have grown and diversified through international
expansion;
• Euronext and LSE both regard technology as a core expertise and
critical to the future of the exchange industry. Each believes in sustained and
proprietary technology leadership, and that technology asset ownership offers a
competitive edge in sustaining growth and delivering innovation and efficiency;
• Both Euronext and LSE consider it their responsibility to be the most
efficient providers of exchange services for their customers. This is
manifested by a commitment continually to improve and simplify access to their
platforms for all users, a commitment to share the benefits of cost efficiencies
with their users, and a commitment to a choice of post-trade services;
• Euronext and LSE share a common vision of growth based on being first
choice for issuers, user friendly and technology driven; and
• Both Euronext and LSE are focused on shareholder value, growth and
returns. Both companies have a common corporate governance culture, and as set
out below, Euronext today announces proposals that would further align it with
UK corporate governance practices (see Section D below). Both companies have
delivered value to their shareholders in the form of dividends, return of
capital, share buy-backs and EPS growth. All these objectives would continue to
be pursued by the combined group.
3. Natural Partners, European Leader, A Global Future
The combination of Euronext and LSE represents the opportunity to leverage two
unique assets - Euronext's pan-European presence and LSE's franchise - to create
what will become the leading global exchange. It would ultimately have a single
new technology-based platform for cash and derivatives and potentially other
asset classes, whilst retaining local access, local regulation and individual
market features for institutional, retail and broker clients alike. This
combination would be a potent and open competitor in trading on a global scale,
and pro-competitive as regards the important post-trade services of clearing and
settlement.
In summary, Euronext believes that a combination of the LSE and Euronext would:
• Create Europe's largest cross-border, horizontal cash equities,
derivatives and information services platform:
- Number one cash equity platform with total market capitalisation of
approximately €3,867 billion and 3,485 domestic listed companies;
- Number one cash equity platform with a turnover value of €2,832
billion in cash market trading on the central order book;
- Leading European exchange for listing small and mid-cap/high-growth,
companies with over 2000 mid-cap listings; and
- Number two globally in derivatives trading with 810 million contracts
traded.
• Create a balanced but focused exchange group with 27% of combined
revenues in derivatives business, 26% of combined revenues in cash business, 19%
of combined revenues in information services, 15% of combined revenues in
software sales and 8% of combined revenues in listing business;
• Result in significant value creation, through substantial cost and
revenue synergies and with minimal execution risk due to the common existing
operating models and culture, and Euronext's integration track record;
• Lead to the creation of an exchange able to play a leading role in the
financing of the European economy, providing access to a deeper liquidity pool
and reduced cost of capital that would benefit users and issuers;
• Appropriately recognise the importance of the City of London within a
decentralised model and seize the unique opportunity to bring LSE and
Euronext.liffe under common ownership;
• Address the issues raised by regulators and European Trading
Associations;
• Set the benchmark for implementing new policies and integrating
European markets, playing a key role in the harmonisation of regulations and
best practices at a European level; and
• Create a platform that can be extended globally, and that no other
combination, nor either company alone, could achieve.
Euronext sets out in detail below the key aspects of a potential combination
with LSE to facilitate a detailed dialogue with users, regulators and both its
own and LSE's shareholders. At the same time, discussions with LSE are
continuing with a view to further refining this proposal and to obtaining the
recommendation of the LSE Board.
B. SYNERGIES
Euronext has unparalleled experience in integrating exchanges cross-border and
delivering synergies. Euronext estimates that annual pre-tax cost and revenue
synergies of €203 million would be available from the combination with LSE.
Details of this estimate, which has been examined by Euronext's auditors, KPMG,
are set out below.
These synergies have been estimated prior to due diligence and calculated on the
basis of the existing costs, operating structures and business volumes of the
Euronext and LSE groups and by reference to current prices, exchange rates,
economic conditions and the current regulatory environment. Due diligence could
uncover potential for additional synergies.
4. Cost synergies of €152 million per annum
Euronext believes that a combination with LSE offers significant potential for
pre-tax cost savings amounting to a contribution to operating profit of €152
million per annum. This represents 17% of the combined group's cost base.
Euronext brings to the combination the largest continental European cash trading
operation which, together with its substantial operational presence in London,
provides the opportunity for significant economies of scale and cost
elimination. Euronext believes it is uniquely positioned to achieve these gains.
Euronext estimates that the full amount of cost synergies will be achieved by
the end of the second full year following completion of the transaction.
• IT optimisation synergies of €94 million
Based on its directly relevant experience, Euronext believes that it can deliver
pre-tax cost savings amounting to a contribution to operating profit of €94
million per annum from the overall rationalisation of the combined group's IT
systems and platforms. The synergies break down as follows :
O Synergies of €55 million resulting from migration to a single cash
trading system
Cash trading of the combined group would be migrated to a single system within
18 months of the transaction completing. It is estimated that this would reduce
IT expense by €40 million per annum and eliminate a further €15 million of
capital expenditure per annum, in each case following completion of the
migration to a single system.
No decision has been taken at this stage between the systems currently used by
the two companies (NSC for Euronext and SETS for LSE). The selection would be
made following a thorough process of user consultation, both directly and via
the proposed LSE user consultative committees. Such a critical decision would
then only be taken with the full support of both the LSE board and the new group
board in order to ensure full weight is given to all constituencies there
represented.
O Synergies of €32 million resulting from optimisation of overall IT
organisation
The combination of all UK IT services in one data centre with a single network
and further use of shared services agreements would lead to global IT
optimisation benefits of €32 million per annum.
O Other synergies of €7 million
This would include, amongst other things, the combination of the EDX offering
and LIFFE CONNECT(R).
• Additional synergies from future implementation of a next generation
system
The combined group would actively pursue the development of the 'technology
roadmap' initiative as proposed by LSE, involving the migration of the existing
cash and derivatives IT systems onto next generation technology. This important
milestone is expected not only to reduce significantly operating costs, but also
to provide a step-change in the quality, functionality, scaleability and product
availability across all asset classes with minimal front-end user disruption.
Any efficiency benefits potentially accruing from the development of the '
technology roadmap' have not been taken into consideration in the synergy
estimates set out herein.
• Reduced premises costs of €15 million, principally in London
In contrast to other European exchanges, Euronext already has a substantial
presence in London as a result of its acquisition of LIFFE in 2002.
Euronext.liffe is currently based in premises in Cannon Bridge (EC4). Euronext
would propose to co-locate Euronext.liffe in the Paternoster Square building
with LSE. Euronext's combination with LSE will also allow other reductions in
premises expenses to be achieved across the group through the optimisation of
key SBUs. This is expected to result in total pre-tax cost savings of €15
million per annum, principally in London.
• Synergies of €29 million resulting from the optimisation of the
combined non-IT functions
The combined group would consolidate certain non-IT functions (e.g., support,
sales and marketing, business and product development, communication, finance
and administration), relating to its cash trading services representing
synergies of €17 million per annum. Synergies of €5 million per annum would be
generated from the combination of listing services. Euronext's index services
operations would be brought together with those of LSE (i.e. FTSE) resulting in
synergies of €2 million per annum. The combination of information services would
result in synergies of €5 million per annum.
• Synergies of €14 million resulting from reduction of other head office
/central functions
The proposed transaction would further be expected to result in the streamlining
of general services and administrative costs in central functions across the
combined group, generating pre-tax cost synergies of €14 million per annum.
5. Integration Track Record
Euronext has an unrivalled and directly relevant integration track record. It
has successfully migrated four separate substantial cash trading systems in
different countries onto a single trading platform with a common rule book, and
similarly combined five separate derivatives markets. It effected such
migrations within budget and on schedule, and adapted its integration and
migration process to include the subsequently acquired LIFFE and BVLP
(Portuguese) exchanges. This proven and successful track record of significant
cross-border integration of national exchanges demonstrates Euronext's specific
and extensive experience of IT integration and cost reduction.
Euronext's cost reduction track record is evidenced by the substantial
efficiencies realised between year end 2001, the first reported full financial
year of the Euronext group following its creation, to year end 2004. During
this period expenses were reduced by 21% from €655 million to approximately €520
milion, and average cash trading fees were reduced by 30%, thus sharing the
efficiencies Euronext generated with users.
6. Revenue Synergies of €51 million pre-tax profit contribution per annum
The combined entity will have a substantially broader product offering, customer
base and geographic scope than either company has alone, and will have the scale
to compete globally. As a result of these factors as well as the companies'
common presence in London and the complementary nature of their product
offerings, Euronext believes that the combination with LSE would create
substantial incremental growth opportunities, as outlined below. The revenue
enhancements that would result are estimated to contribute €51 million to
pre-tax annual profits, would be fully realised by the end of the third full
year following completion of the transaction and represent 4% of the combined
group's revenues.
• €25 million of revenue synergies resulting from common ownership of UK
equities and derivatives businesses
The proposed combination would bring under common ownership the cash equities,
corporate bonds and derivatives businesses in the UK. This would create a
unique opportunity to develop new products which would be sold through an
expanded distribution and trading network. These synergies represent 7.5% of
the combined group's derivatives revenues.
O Enhance Product Range
Drawing upon the expertise of both Euronext.liffe and LSE, new and innovative
products and services would be developed for an increasingly sophisticated
customer base. Opportunities include:
- The development of new cash and derivatives convergence products,
e.g. linking LSE's cash bond business with Euronext's gilts futures market,
creating innovative trading possibilities;
- The establishment of pricing architecture to make combined cash and
derivatives trading more feasible and attractive;
- The facilitation of index arbitrage by packaging baskets of UK
equities currently traded on LSE with FTSE100 index derivatives currently traded
on Euronext.liffe; and
- The combination of the new OTC product initiatives of EDX and
Euronext.liffe currently being pursued concurrently.
O Enlarge and cross-fertilise distribution networks
The combined group would accelerate the development of the UK equity derivatives
market by applying Euronext.liffe's expertise and product offering across the
LSE's broad UK network of retail cash intermediaries, replicating similar
successful initiatives in Euronext's Continental markets.
The combination would also accelerate the development of EDX by bringing its
products and expertise onto the Euronext.liffe network. This would result in a
ten-fold increase in the distribution capability of EDX's products and introduce
these products to new geographic markets.
• €10 million of revenue synergies resulting from increased listings
In 2004, Euronext listed some 50 new companies raising nearly €10 billion in new
equity. LSE (including AIM) listed 293 new companies during the same period.
Privatisations with an estimated value of around €80 billion are currently
anticipated on Euronext, and the combined group would have a strong pipeline in
midcap stocks through AIM and Alternext. Euronext believes that the combination
would create the most attractive market for new listings, and estimates that €10
million of additional annual pre-tax profit contribution would be generated from
this, representing around 10% of the pro forma combined revenues from this
division and assuming 4-5 incremental major new listings per annum.
O International Listings: creating the definitive alternative to the NYSE
The LSE has a specific expertise in international listings, with approximately
470 international listed companies. Combining the two most vibrant European cash
markets, LSE in sterling with a well positioned brand and Euronext as the
Eurozone leader, will enable the new group to compete even more effectively for
listings by companies from outside of the group's home markets. These would in
particular include listings of companies from emerging markets, such as Eastern
Europe, Russia, Asia, China and India, which are expected to be a strong source
of new listings.
O Increase pan-European mid cap/growth company listings: a European
alternative to NASDAQ
The combined group would become the leading listing venue in Europe for small
and mid-cap growth companies. AIM, the most successful mid-cap market in Europe,
attracted 243 IPOs in 2004 and currently has 1,021 listed companies (including
116 international companies). AIM would benefit from access to the pool of
Continental European potential IPOs in the sector, offering credibility,
expertise and substantial liquidity. The development of Euronext's own
initiative, Alternext, would be effected jointly with AIM.
• €10 million of revenue synergies resulting from the expansion of
content and distribution of Information Services and index combination
The combined group would be expected to generate €10 million of additional
annual pre-tax profit contribution from the expansion of information services.
These synergies would represent 4% of pro forma combined revenues for this
division.
The combined group would create for the existing Euronext markets a continental
'RNS' equivalent based on the LSE model. It would be distributed to Euronext's
customer base of 1,333 listed companies, in addition to LSE's existing customer
base of 2,837 listed companies.
The combined group would package the market information of Euronext and LSE in a
single data feed through a unified IT system. This is expected to result in
increased sales of data services to market participants and to create the
opportunity to sell data directly to end-users. Euronext has seen an increasing
demand by end-users for tailored data with value-added analysis services.
The market information generated by the combined group would permit it to
leverage FTSE's franchise and expertise to develop a global range of indices,
incorporating complementary Eurozone and Sterling stocks and derivatives on
existing indices.
Euronext would also foster LSE's successful Proquote initiative by extending its
UK platform to the wider market for international data terminals and in
particular promoting the distribution of Proquote terminals to Euronext users.
• €6 million of revenue synergies resulting from increased cross-border
cash trading volumes
Based on Euronext's experience, the combined group is expected to generate €6
million of additional annual pre-tax profit contribution from an increase in
cross-border cash trading volumes. These synergies would represent 2% of pro
forma revenues for this division.
The single electronic cash trading platform to be used by the merged group is
expected to generate increased cross-border trading volumes, producing enhanced
liquidity and resulting in reduced spreads which would result in higher revenue
growth than either company could achieve independently.
7. Revenue Enhancement Track Record
Euronext believes that its track record with acquired companies demonstrates its
ability to deliver demonstrable revenue accretion. For example, since joining
the Euronext group in early 2002, LIFFE (which now comprises Euronext's
international derivatives businesses in London, Amsterdam, Brussels, Lisbon and
Paris) has achieved outstanding growth both in revenues (58% from £138 million
in 2001 to £220 million in 2003) and profitability.
Euronext believes that the integration of LIFFE within Euronext has contributed
significantly to LIFFE's successful performance, achieving superior growth and
higher profitability than it would have achieved as an independent company.
Euronext contributed its existing derivatives businesses in Amsterdam, Brussels,
Lisbon and Paris to LIFFE thus increasing its scale and enhancing its geographic
footprint. Furthermore, since its integration within Euronext, it has
demonstrated its track record of innovation, by developing new products and
continuously launching initiatives, such as options on trackers and ETF
products, new equity options and derivatives on indices, with an ongoing
commitment to customer service, technology enhancement and market leadership.
Euronext has cross-fertilised LIFFE's marketing and product development and
pursued technological improvements, successfully migrating the LIFFE CONNECT(R)
system across Euronext's markets and outsourcing the LIFFE CONNECT(R) software
to the Chicago Board of Trade, which previously used the Eurex platform.
The growth and profitability achieved by LIFFE has also demonstrated the
strength of Euronext's decentralised SBU business model, where management, with
clear business line P&L responsibility, has delivered a superior performance.
8. Restructuring costs of €184 million, dis-synergies of €20 million
The total cost of achieving the savings outlined above is expected to amount to
€184 million, which would be incurred in the two years following completion of
the transaction. Of this amount, €153 million relates to costs that will be
required to achieve the cost synergies. The remaining amount of €31 million
represents investment required to achieve the projected revenue synergies. All
amounts will be expensed during the two years following the transaction
completing.
Cost and revenue synergies are stated before allowing for the estimated effect
of €20 million in pre-tax dis-synergies as a result of the proposed fee
reductions summarised in Section C.
C. User Proposition
Euronext supports the view that European capital markets development will be
promoted by transparent and efficient trading. Euronext believes that this is
achieved only through close co-operation and mutual respect between exchanges
and their users. Euronext's proposals on governance (summarised in Section D)
reflect and support this approach.
Euronext and LSE have a common user-friendly market model based on an open
post-trade infrastructure. The combination of Euronext and LSE would accelerate
the creation of an open, efficient, and competitive pan-European trading
infrastructure. Euronext is convinced, based on its track record, that the
efficiencies resulting from the transaction would be reflected in greater
liquidity, reduced costs, and lower fees for users
9. Market Model
Trading
The combined group's activities would be centred on cash and derivatives
trading. Euronext recognises that users require reliable and efficient systems,
but also innovation and scaleability to support, in particular, fast growing and
profitable businesses (e.g., derivatives). Euronext would migrate cash trading
onto a single system. The system will be selected following a thorough process
of user consultation and will clearly take into consideration user concerns
regarding migration.
Open Post Trade Architecture
By separating its clearing from its trading activities through the formation of
LCH.Clearnet, and through the progressive transfer of its settlement systems to
Euroclear, Euronext has supported the development of independent clearing and
settlement entities which may be used by any exchange. For the time being
Euronext owns a minority, non-controlling shareholding in LCH.Clearnet and the
governance structure in place already specifically meets the six criteria of
separation identified by LIBA and other trade bodies in their position statement
published on 3rd February, 2005.
Open back-office architecture permits the integration of different markets on
the same technology platform, allows rival exchanges to offer competing trading
services cleared and settled through the same arrangements, and facilitates the
comparison of trading and other associated costs. The combined group will
continue with this market model.
Both Euronext and the LSE obtain clearing services from LCH.Clearnet, an
independent clearing house that provides clearing services to many exchanges on
non-discriminatory terms. Both Euronext and the LSE also settle trades through
Euroclear, which is user-governed and not affiliated to any exchange.
Euronext recognises that users require a careful balance between market
efficiency and the stability of established systems and procedures. Since
Euronext and LSE currently both link to LCH.Clearnet, Crest, and Euroclear,
users will not have to change systems connections, incur related costs or suffer
disruptions. These arrangements were entered into after consultation with
users. As the combined group's contractual arrangements with post-trade service
providers are considered for renewal, Euronext's proposed governance structure
will ensure that users will be fully consulted prior to such agreements being
either renewed or changed.
10. Fee Reductions
10% Fee Reduction for UK Cash Trading
Immediately on completion of the transaction an overall fee reduction of 10% for
central book cash trading in the UK will be implemented. Obviously, the combined
group will commit not to increase its overall cash trading fees from this
reduced level.
More importantly, Euronext is committed to a policy of continued fee reduction
over future periods. As set out in the proposals in Section D, Euronext
believes that appropriate governance mechanisms are in place to ensure that
users are fully involved in discussions regarding fees and tariffs.
These commitments are supported by Euronext's track record: it has reduced
average cash trading fees by 30% since the integration of its cash exchanges.
10% Fee Reduction in Information Services
In addition, information services tariffs for clients using a combined data
package will be reduced by 10% immediately after completion of the transaction.
D. GovernancE
Euronext believes that corporate governance is a critical success factor and
differentiator to ensure user, shareholder and regulator satisfaction with a
complex European cross border exchanges group:
• As a benchmark for its issuers and customers, an exchange must apply
the highest possible governance standards; and
• a pan-European exchange should take into account corporate governance
practices in its local markets ('best of the best' approach).
11. Unitary Single Tier Board for the New Group and Best Practice Corporate
Governance
Consistent with this vision, in the context of any proposal for the LSE,
Euronext, with the authorisation of its Supervisory Board, announces its
intention to move from the so-called 'structuurregime' and adopt (subject to
shareholder approval) a unitary, single tier board structure consistent both
with accepted UK practice (the Combined Code) and with the highest international
corporate governance standards, in place of its existing two-tier board
structure.
The unitary board will be a single tier decision making forum which includes
both independent non-executive directors and executive management directors, and
thus has inherent checks and balances. The entirety of the board (both
executives and non-executives) will be elected directly by, and be directly
responsible to, its shareholders. The Euronext Board will also be responsible
for appointing fully independent Audit, Remuneration and Nomination, and IT
committees.
Euronext believes that this unitary board structure will further increase
efficiency, accountability to shareholders and alignment of the board and
management's interests with those of the company's stakeholders. Euronext
further believes that this structure clearly demonstrates its willingness to
take into consideration the key concerns of the City of London and the UK
regulator as regards governance matters, and specifically addresses any concerns
regarding the two tier Board system.
Subsequent to any successful offer for LSE, Euronext intends to seek a dual
primary listing for its shares in London. The effect of this will be that
Euronext will be subject to the listing rules in place in both Paris and London.
Euronext believes that as a result of these steps, its corporate governance
regime will be closely comparable to that of a UK listed plc.
12. New Group Board composition
The cornerstones of the Board's composition will be independence, shareholder
focus, industry expertise and user sensitivity, with geographic diversity across
the combined group's home markets. The proposed composition would be as follows
(post a combination with LSE):
• a single tier 16 person board, comprising 12 independent non-executive
directors and including representation from each of the financial markets
comprising the group, and 4 executive directors;
• an independent, non-executive Chairman;
• an independent, non-executive Deputy Chairman;
• 5/6 out of the 12 non-executive members to be drawn from the UK
financial community;
• 2 non-executive members to address user interests; and
• executive board members to be the CEO, CFO, and the heads of the new
group's two most important SBUs, being the Cash Trading and Listing SBU and the
Derivatives SBU.
The adoption of a single tier board with this composition would be proposed to
Euronext's shareholders at the EGM which would be convened to approve the
acquisition of LSE. The proposal would have effect immediately on the
transaction completing, thus permitting the new Board (including the
representatives of the UK financial community and users) to oversee and have
input into the smooth execution of the proposed integration process.
13. Independent LSE Board Composition
While the acquisition of LSE would be a transformational step for Euronext and
of unparalleled importance to the group, Euronext believes that the important
successes achieved in its experience with LIFFE are relevant to a transaction
with LSE. To this end, Euronext would implement essentially the same governance
and regulatory model with LSE as has been developed with great success in its
combination with LIFFE and proven with both the FSA and the user community.
LSE would continue to be governed by its own independent board of directors with
user representation.
The proposed composition of the LSE board would be as follows:
• single tier 12/15 person board comprising 8/10 independent, non
executive directors (as detailed below), 2/3 executive directors and 2/3
(maximum) directors representing Euronext;
• an independent Chairman appointed in consultation with the FSA and the
other independent, non-executive members of the LSE board;
• 2/3 independent, non-executive directors, one of whom would be the
lead director responsible for Regulation and Compliance matters; and
• 5/6 non-executive directors representing the user community
User representatives would therefore constitute approximately half of the Board
members of LSE and would be the single largest group on the Board.
User responsiveness and representation for LSE would be further ensured through
the creation of two user consultative committees relating to cash trading: one
for the UK and one with a pan-European purview. A strategic committee composed
of users would also be created to advise on strategic initiatives and the
development of the business. These committees would discuss all matters central
to LSE's operations, including, inter alia, tariffs, quality of service and
product development.
14. Extending Euronext's successful cross-border decentralised model
Euronext's successful business model is operationally organised and managed via
SBUs on a group-wide basis, consisting of cash trading and listing, derivatives,
and information services together with the group's IT software sales business.
Managers have full P&L accountability for the SBUs which they lead. This
approach has proved the most successful for driving strong performance in a
multi-national, multi-product cross border exchange. The SBU structure enables
the business lines to be managed optimally on a group-wide transnational basis,
with the focus on efficiencies and best practices transcending narrow geographic
market considerations.
For instance, the derivatives SBU, which operates under the brand name
Euronext.liffe, is operationally managed from London as well as Amsterdam for
equity options. The SBU structure has been a key contributor to the success of
the smooth integration of LIFFE within the Euronext group and its subsequent
above market growth. This structure would naturally be extended to embrace LSE
in addition to the group's existing operations in Amsterdam, Brussels, Lisbon
and Paris.
The head of the cash trading and listing SBU will oversee the Euro denominated
market activities which will be run from Paris and will also be the CEO of the
LSE running the Sterling denominated market. As CEO of the LSE, this role will
be based in London. The executive management team of the cash trading and
listing SBU would include both UK and Continental European managers responsible
for the overall management of the business. The head of the information
services SBU will be based in London, close to the group's most important
customers, with the scope of the Amsterdam operations unchanged.
15. Dual primary listing
At completion, Euronext intends to seek a dual primary listing for its shares on
the London Stock Exchange. Euronext considers this to be an important
validation of the group's support for the rules and practices of the London
market. Euronext would consequently be bound by the rules of the UK Listing
Authority, and in case of differences from those of its other primary listing in
Paris, would commit to adopt the highest standard (the best of the best).
Euronext is also currently investigating mechanisms to increase the
attractiveness of Euronext shares to UK shareholders.
E. REGULATION
16. Euronext already operates in a multinational regulatory framework that
accommodates expansion
Euronext already operates within a regulatory framework which was specifically
designed and adapted in coordination with its national regulators to accommodate
its cross border nature and expansion. Its two cross-border acquisitions (LIFFE
and BVLP (Portugal)) have been seamlessly integrated into this framework.
Each of the exchanges in the Euronext Group holds an exchange license granted by
the national stock exchange regulatory authority and operates under the
supervision of such authority. In addition, the national regulators of the
Euronext exchanges are parties to Memoranda of Understanding (one for the cash
markets and one for the derivatives markets) designed to ensure coordinated
supervision and regulation of the Group and the regulated markets it operates.
This coordination is effected via a college of regulators (the Chairmen's
Committee).
This structure was designed to be extended to cover exchanges which join the
Euronext Group, and it has successfully achieved this objective. The national
regulators of BVLP and LIFFE have remained the direct regulators of such
exchanges following their integration into the Euronext Group and the regulators
have become parties to the relevant MOUs. For instance, the FSA continues to be
the sole regulator of LIFFE (as it is a Recognised Investment Exchange) and is a
party to the derivatives MOU covering Euronext.liffe's overall derivatives
operations. Euronext (and its continental European regulators) are thus
accustomed to working in close coordination with the FSA, and vice-versa.
17. Regulation of LSE
As part of the Euronext Group, LSE would fit seamlessly into this existing
regulatory framework. It would remain a UK Recognised Investment Exchange ('RIE
') regulated solely by the FSA. Euronext commits that LSE will remain a UK RIE
and is considering appropriate mechanisms to provide the FSA with the guarantees
it seeks in this regard. Separate trading rule books would be maintained for
each of LSE and the Continental European exchanges in order to provide
continuity for users and issuers.
Euronext is fully conscious of the importance of the LSE, as an RIE, to the
London market and the wider regulatory framework including corporate governance
and capital raising, and firmly believes that this proposal, together with its
successful experience integrating LIFFE, will allow it to satisfy UK regulatory
requirements and concerns.
F. SUMMARY
Euronext created the first fully-integrated, cross border cash and derivatives
exchange in Europe. Euronext is an international company with a multinational
board and management. It has a track record of successfully integrating
cross-border businesses, migrating IT platforms and delivering revenue
accretion.
Euronext is convinced that it is the natural partner for LSE and that the
combination will create the European leader with global potential that exceeds
that of any other potential combination. Euronext considers that this
transaction would be good for users, shareholders and the City of London.
Euronext has a longstanding commitment to shareholder value. This has been
demonstrated through dividends (a 55% payout ratio, amongst the highest in the
European exchange industry), and share buybacks (8% of ordinary share capital
repurchased in the second half of 2004) coupled with growth in underlying
earnings. The combined group's strong growth and cashflow prospects will support
Euronext's commitment to continued attractive returns to shareholders, and
Euronext will demonstrate that any transaction proposed will create value for
its shareholders as well as benefits for users.
Euronext confirms that it has agreed in principle financing from a syndicate of
international banks comprising ABN AMRO, Barclays, BNP Paribas, Calyon, HSBC,
Morgan Stanley, Societe Generale and UBS. Any offer would be financed from
Euronext's cash balances and from fully underwritten loan facilities from the
above-mentioned syndicate.
Euronext will now discuss the points raised in this announcement with
shareholders (of both Euronext and LSE), users and regulators. Euronext will
also continue to hold discussions with LSE with a view to obtaining a
recommendation from the LSE board for a cash offer for LSE by Euronext.
Following such discussions and prior to making any offer, Euronext reserves the
right to amend any or all elements of the potential proposals set out herein.
In parallel, the Office of Fair Trading has commenced its preliminary review of
matters raised by this proposed combination.
There can be no assurance at this stage that any offer will be made.
Enquiries:
EUronext
Antoinette Darpy (Press Enquiries) Telephone: +33 1 49 27 53 75
Serge Harry (Investor Relations) Telephone: +33 1 49 27 14 94
bRUNSWICK (Press Enquiries) Telephone: +44 20 7404 5959
Kevin Byram
Andrew Garfield
ABN AMRO Telephone: +33 1 56 21 90 90
Pierre Fleuriot
morgan stanley & Co. limited Telephone: +44 20 7425 5000
Caroline Silver
UBS Telephone: +44 20 7567 8000
Alistair Defriez
An interview with Jean-Francois Theodore, Chief Executive of Euronext, is
available on www.euronext.com and www.cantos.com in video, audio and transcript.
A conference call for analysts and investors will be held at 0900 GMT (1000 CET)
on the following number +44 (0) 1452 541077.
A press conference will be held at the offices of Euronext.life, Cousin Lane,
Canon Bridge, London, EC4R 3XX at 1045 GMT (1145 CET). Should you be unable to
attend this press conference in person a dial-in facility is available on the
following number +44 (0) 1452 541076.
ABN AMRO, Morgan Stanley & Co. Limited and UBS are acting for Euronext and no
one else in connection with the potential transaction and will not be
responsible to anyone other than Euronext for providing the protections afforded
to their respective clients or for providing any advice in connection with the
potential transaction.
The information contained in this announcement does not constitute an offer or
an invitation to purchase any securities of the London Stock Exchange plc and
there can be no assurance at this stage that any offer will be made.
Each of ABN AMRO, Morgan Stanley & Co. Limited, KPMG and the members of the
financing syndicate has consented to the use of its name in the form and context
in which it appears.
It is possible that this announcement could or may contain forward looking
statements that are based on current expectations or beliefs, as well as
assumptions about future events. Undue reliance should not be placed on any
such statements because, by their very nature, they are subject to known and
unknown risks and uncertainties and can be affected by other factors that could
cause actual results, and Euronext's plans and objectives, to differ materially
from those expressed or implied in the forward looking statements.
There are several factors which could cause actual results to differ materially
from those expressed or implied in forward looking statements. Among the
factors that could cause actual results to differ materially from those
described in the forward looking statements are Euronext's ability successfully
to combine the businesses of Euronext and LSE and to realise expected synergies
from that combination, changes in the global, political, economic, business,
competitive, market and regulatory forces, future exchange and interest rates,
changes in tax rates and future business combinations or dispositions.
Euronext undertakes no obligation to revise or update any forward looking
statement contained in this announcement, regardless of whether those statements
are affected as a result of new information, future events or otherwise.
No statement in this announcement is intended to be a profit forecast and no
statement in this announcement should be interpreted to mean that earnings per
share of Euronext for the current or future financial years would necessarily
match or exceed the historical published earnings per share of Euronext.
APPENDIX
SOURCES AND BASES OF INFORMATION
General
1. Financial information for the combined Euronext and LSE group has been
obtained by combining the unaudited, unpublished preliminary results for
Euronext in respect of the year ended 31 December 2004 with the audited
financial statements of LSE in respect of the year ended 31 March 2004.
2. Where revenue enhancements or cost savings are stated to represent an
increase or decrease of a percentage of the combined group's revenues and costs,
percentages are calculated by reference to figures for the combined group
calculated in accordance with paragraph 1 above.
3. An exchange rate of €1.46 = £1 has been used throughout this
announcement.
Page 6
4. The approximate number of trades conducted on Euronext's cash trading
platform is stated in information published by the Federation of European Stock
Exchanges ('FESE') in December 2004 based on the whole year for 2004 (in their '
Table 3: listed companies and investments').
Pages 7 and 8
5. The ranking of the combined Euronext/LSE entity in terms of total market
capitalization and number of listed companies is derived from information
published by FESE in December 2004 (in their 'Table 3: listed companies and
investments') and information published by the World Federation of Exchanges ('
WFE') in its 'Focus' publication of January 2005.
6. The ranking of the combined Euronext/LSE entity in terms of annual cash
equity platform turnover in cash market trading is derived from information
published by FESE in December 2004 based on the whole year for 2004 (in their '
Table 3: listed companies and investments').
7. The ranking of the combined Euronext/LSE entity in terms of the number
of derivatives contracts traded annually relates to 2003 and is derived from the
Deutsche Borse 2003 annual report. The number of contracts traded relates to
2004 and is derived from Euronext's monthly trading statistics (published on its
website) and from LSE's 2004 annual report and accounts and the LSE's third
quarter trading statements for 2003 and 2004.
Pages 11 and 16
8. The statement regarding the reduction in Euronext's average cash
trading fees is derived from Euronext's 2001 third quarter unaudited results
announcement and its unaudited, unpublished preliminary results for the
financial year ended 31 December 2004.
Page 13
9. Revenue figures for LIFFE are extracted from the LIFFE annual reports
for 2001 and 2003.
This information is provided by RNS
The company news service from the London Stock Exchange
