Trader scepticism of Deutsche Boerse AG’s planned takeover of London Stock Exchange Group hasn’t been enough to overcome a rally in the British company’s stock.
LSE surged as much as 28% since June to a record close this month, even as merger arbitrageurs are still bearish on the deal.
They’re seeing only a 40% chance of the transaction completing, based on a survey last week of 18 event-driven desks, equity analysts and fund managers.
While that’s more than the 26% odds they expected in June, one major reason why LSE shares have rallied has nothing to do with the deal.
Britons’ Leave vote has sent sterling tumbling, lifting LSE and UK companies listed on the country’s benchmark FTSE 100 Index. Albert Fried & Co’s Sachin Shah mentions another reason for optimism, even if the merger falls through: LSE is compelling as a standalone business, and a low pound may tempt rival suitors.
“The probability of the deal closing might not even matter,” said Shah, a special-situations and merger-arbitrage strategist at Albert Fried in New York. He puts odds of the deal completing between 10 and 15%. “The pound is influencing many people’s perception. LSE shareholders are saying, ‘Who cares what your stock is doing? We are still potentially better off.”’
The German company’s shares haven’t had the same boost. They’ve fallen about 4% since June.
The main worry for the deal is the German regulator’s complaints about the merged company’s planned headquarters in London, said Louis Capital Markets’ Ben Kelly. LSE’s intention to sell a French unit to appease European competition regulators have only somewhat eased concerns, he said.
“There’s still uncertainty about how the chips are going to fall,” said Kelly, a risk-arbitrage analyst at Louis Capital in London. He sees a 25% chance the merger will go through. “Because it is so uncertain, a lot of people don’t want to touch it with a barge pole.
People feel like they can get an edge on other situations, whereas this one, it’s difficult to get an information advantage.”
The close of Anheuser-Busch InBev NV’s $104bn takeover of SABMiller last month freed up funds that would typically flow into other deals in the region, like LSE-Deutsche Boerse.
 But arbitrageurs are probably playing other mergers instead, including those involving Syngenta AG, Osram Licht AG, Arcam AB and Delta Lloyd NV, Kelly said. Investors are staying away from LSE: The number of shares traded in the past 60 days was about 470,000 on average, near the lowest in two years.
Commerzbank AG is more bullish and sees more than 50% odds of the deal completing. LSE and Deutsche Boerse valuations are too low, analyst Christoph Blieffert wrote in a note.
“Market expects a failure –- we are more constructive,” Blieffert said. “A successful transaction would result in more than 40% upside for Deutsche Boerse and more than 50% for LSEG shares in a bull-case scenario. Neither the synergy potential nor any potential uplift in multiples is currently reflected in the valuation of the participating companies.”
LSE could attract a rival suitor, thanks to a weak pound that makes the company look like a bargain, Shah said. In May, Intercontinental Exchange Inc abandoned a potential offer, though it is able to revisit it as soon as next month.
“I see that path, but I’m not sure we’re there yet,” he said. “Maybe the market is getting ahead of itself.”
Representatives at Deutsche Boerse, LSE and ICE declined to comment.