Investors are undervaluing the planned mega-merger of
European exchange giants Deutsche Boerse and the London Stock
Exchange, according to analysts at Morgan Stanley.
Anil Sharma, who leads the investment bank’s
European diversified financials research unit, upgraded both
bourses on Thursday citing strong balance sheets, a favorable
interest rate environment and potential cost savings.
The pair are set to merge this year, creating the
region’s dominant exchange operator with pre-and
post-trade services spanning stocks, bonds, currencies and
The tie-up’s success rests with European
competition regulators who will have their say in the coming
months on whether the merger places too much market
infrastructure in the hands of a single operator.
"Given the binary outcome of this we do not believe the
market is pricing in deal success, with our stand-alone price
targets implying upside," Sharma wrote in a note to
"Put another way, we see limited downside risk to either
Deutsche Boerse or LSE’S earnings or the multiple
investors are willing to pay should the deal not go ahead.
"A decision from the EU's anti-trust authorities is due in
May (at the latest), the risk/reward appears asymmetric to us
– with a deal we see scope for 35-45% upside, without
less than 10% downside."
Deutsche Boerse’s central securities depository
Clearstream and the LSE’s Italian clearing house
Cassa di Compensazione e Garanzia (CC&G) are singled out by
Morgan Stanley as key units.
Meanwhile, Sharma’s team is also positive on
Euronext’s prospects and described the European
stock exchange operator’s deal to buy
LSE’s French clearing house Clearnet (which is
dependent on the success of the Deutsche Boerse/LSE merger) as
"Whilst contingent on completion of the LSE-DB transaction,
we estimate this deal could deliver 25% earnings per share
accretion," Sharma added.
"Post completion, we believe Euronext's competitive
positioning would be improved and the group becomes less
reliant on cyclical cash & derivatives trading, with post
trade growing to 30% of revenues."
Exchanges preferred over asset
On a sector basis, Morgan Stanley’s stock
pickers favour exchanges over asset managers.
Rising rates and a known regulatory landscape support
bourses, the firm believes, whereas pressure is intensifying on
the business models of fund houses.
"We see multiple headwinds for asset managers ( fee
pressure, regulations, passives, fintech) that could disrupt,"
wrote equity analyst Adedapo Oguntade.
"The exchange sector is now our most preferred. The
regulatory landscape is broadly a known entity, and this
certainty together with potential positive tail risks (easing
US regulations & taxes) provide optionality around capital
allocation, either for shareholder return or accretive