LSEG London Stock Exchange Group Plc

By Eyk Henning 

FRANKFURT -- Deutsche Börse AG and London Stock Exchange Group PLC Friday said they would push ahead with their planned $30 billion merger, after the U.K.'s vote to exit the European Union, but people working on the deal fear that the companies could struggle to win the backing of investors' and regulators.

A referendum committee consisting of six representatives of both companies, including Deutsche Börse's Chairman Joachim Faber and his LSE counterpart Donald Brydon, will in the coming days initiate talks to assess the impact on the deal, the stock operators said in a joint statement.

"We are convinced that the importance of the proposed combination of Deutsche Börse and LSEG has increased even further for our customers and will provide benefits for them as well as our shareholders and other stakeholders," said Joachim Faber, Chairman of the German company and head of both companies' referendum committee.

Donald Brydon, chairman of the board of the LSE and designated chairman of the combined group, added the merger represents a compelling opportunity for both businesses despite the vote.

People familiar with the matter earlier Friday said those talks will circle around a potential relocation of the planned London-based holding company. Those people added they were skeptical that both companies can agree on the issue without delaying the transaction. The committee will likely take several weeks if not months to make a recommendation over the deal.

Time is essential however, because LSE shareholders will vote on the tie up at a meeting on July 4, and the tender offer for Deutsche Börse shares is due to expire on July 12.

Uncertainty around the deal is weighing on both companies. Deutsche Börse was down 4% at EUR74.77 ($85.13) while the LSE fell 13% to GBP23.80 (GBP35.4).

People familiar with the deal expect the steep plunge of LSE shares may leave investors asking for a renegotiation of the merger ratio. Shareholders in the German company were originally going to receive 54.2% in the combined group, while LSE investors would have been left with 45.8%. At least 75% of Deutsche Börse's shares need to be tendered for the deal to go through.

The main impact [of a Brexit] would be the LSE/DB1 transaction since it appears unlikely that the parties' shareholders are likely to vote in favour of this transaction. We expect the spread to push wider to 8-10% discount of LSE to DB1 as likelihood of the deal ebbs," brokerage firm Market Securities said in a note to clients Friday.

Additionally, German politicians and regulators have said that they wouldn't give the deal their blessing should the U.K. leave the EU because the combined entity would then be supervised by a regulator located outside the EU. That appears to be a no-go for German authorities.

The companies in their joint statement said they're in "ongoing and constructive dialogue with the appropriate regulators and authorities."

Industry observers said a possible solution was to let the deal go ahead as planned and assure regulators that the company's base would be moved to Frankfurt after closing of the transaction, which was planned for the first quarter next year. But many observers were skeptical about such a scenario because any relocation would necessarily lead to a change in the planned management setup, a time-consuming process that won't be resolved before LSE's July 4 shareholder meeting.

Under the current plan, Deutsche Börse's Chief Executive Carsten Kengeter is poised to lead the combined group. An LSE representative would likely have to lead the combined company, however, to keep the powers of the so-called merger of equals in balance.

In any case, both companies could attempt to strike a new deal should the current one collapse. That could be complicated, however, because the owner of the New York Stock Exchange, Intercontinental Stock Exchange Inc., could come back with a bid for LSE.

Write to Eyk Henning at eyk.henning@wsj.com

(END) Dow Jones Newswires

June 24, 2016 22:03 ET (02:03 GMT)

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