Majestic Research

Dow Jones Newswires

Shareholder TCI Fires Shot Across Euronext Bow

By Nina Sovich, Digby Larner and Gaston F. Ceron
Published: August 30, 2006

A major Euronext NV (29064.AE) investor harshly criticized the pan-European exchange for not clearly agreeing to let shareholders vote on a merger proposal from Deutsche Boerse AG (DB1.XE).

The criticism was leveled by the Children’s Investment Fund Management (U.K.) LLP, which claims a 10% stake in Euronext and opposes the exchange’s plan to merge with the parent of the New York Stock Exchange.  On Wednesday, TCI, as the fund is known, warned Euronext Chief Executive Jean-Francois Theodore that a failure to hold a vote on Deutsche Boerse’s competing offer could violate the board’s fiduciary duty to shareholders.

The comments arrive at an inopportune time for the NYSE and Euronext, as the two exchanges are moving ahead to complete their merger in the next several months.

Euronext has said it will present plans to merge with Big Board parent NYSE Group Inc. (NYX) to shareholders for approval at a meeting in December.  But Deutsche Boerse has remained interested in Euronext.  Speaking on a conference call Wednesday, TCI fund manager and founder Chris Hohn asked Theodore for a firm yes or no answer on whether shareholders would also be allowed to have a say on the Deutsche Boerse proposal.

Hohn, clearly angered by Euronext, said:  “I would like to make you aware that the board could be in breach of its fiduciary duties if a valid offer is not brought to shareholders without an economic reason.” TCI also owns shares in Deutsche Boerse.

Theodore declined to answer Hohn’s question, saying only: “The board will have the shareholders’ best interest in mind.”

“We convey to you your answer is not acceptable as an answer,” Hohn said. “It is not acceptable.”

It’s unclear how much damage TCI’s stance could do to the deal between the Big Board and Euronext. There’s still plenty of time left until the December shareholder meeting, so things could still change in one direction or another. “I think Euronext probably could have handled this better,” said Doug Atkin, a former electronic-trading executive who now is the CEO of Majestic Research in New York.

Atkin said Euronext should let shareholders vote on both deal options—the NYSE and Deutsche Boerse. Hohn was quoted on the AFX news service as saying he would hold a parallel meeting on Deutsche Boerse’s Euronext bid if the proposal isn’t on the agenda for the December meeting on the NYSE deal.

Octavio Marenzi, CEO of Celent, a financial research and consulting firm, said TCI’s vocal opposition “spells bad news” for the NYSE-Euronext marriage. Marenzi, whose firm has exchanges such as Deutsche Boerse and Euronext among its clients, speculated that the NYSE could be forced to sweeten the terms of its proposal. “The NYSE/Euronext merger is not yet a done deal,” he said.

The merger is important to both exchanges. It would give the Big Board a significant presence in Europe that would allow it to list foreign companies that don’t want to meet more-stringent U.S. regulations on Euronext. Euronext’s derivatives operation also would diversify the NYSE’s business.

A spokesman for the NYSE, Richard Adamonis, declined to comment. In a mixed day for the stock market, NYSE shares were recently off 0.7% at $59.48. In Europe, Euronext shares rose 3.2%.

This isn’t the first time that TCI has been vocal about an exchange merger. Last year, the fund opposed Deutsche Boerse’s plans to acquire London Stock Exchange PLC (LSE.LN), sparking a shareholder rebellion that led to the ouster of the German exchange’s CEO.

Another hedge fund that took part in that revolt, New York-based Atticus Capital, told The Wall Street Journal in June that it backed the NYSE-Euronext pact. Wednesday, a spokesman for Atticus—which owns shares in Euronext, the NYSE and Deutsche Boerse—declined to comment.

Theodore was asked in a conference call with journalists earlier Wednesday if the NYSE is under pressure to increase its offer for Euronext because share price movements may have made the competing bid from Deutsche Boerse more attractive.

He said: “Comparison of the value is complicated because the Deutsche Boerse offer is based on a three month volume-weighted average.  It’s not appropriate to look at a snap shot on (such) calculations.”

Nevertheless, Atkin said the Deutsche Boerse offer now “looks superior on a financial basis.” He said the NYSE is facing multiple challenges, such as a battle for market share in the trading of its stocks with U.S. rival Nasdaq Stock Market Inc. (NDAQ), and complaints from some NYSE floor brokers who are upset with an increase of their trading fees. A recent Majestic report said some of those brokers “are now retaliating against the NYSE’s actions by sending NYSE-listed order flow to Nasdaq.”

Atkin, the former CEO of Instinet, said one way for the NYSE to make itself more appealing would be to go fully electronic.  The Big Board is ramping up an improved automated-trading system, known as the “hybrid market,” that would run alongside its traditional floor-based market. But Atkin said this doesn’t go far enough.