2 Deals to Watch: Beer With a Shot of Derivatives

NEW YORK ( TheStreet) -- To get regulatory approval for their $9 billion merger announced in February, NYSE Euronext ( NYX) and Deutsche Boerse will open up their combined derivatives businesses to rivals and divest other units.

In October, European Union competition authorities added to objections of the merger, which values NYSE Euronext at $36.09 a share and received shareholder approval in July. The New York-based exchange has traded 25% below the merger price because of increasing scrutiny about the deal, falling trading volumes fell and global economic fears. On news of the derivatives remedy, NYSE shares rose over 5% to $28 a share in pre-market trading.

The merger was subjected to a second review by the European Union in August because it was seen to lead to increasing concentration in derivatives trading and clearing, potentially harming competitiveness. When announcing a second review, EU Competition Commissioner Joaquin Almunia said, "The proposed merger would remove a strong competitor from the market and would give the merged company by far the leading position in derivatives trading in Europe."

In October, the European Union further highlighted the combined company's dominance in derivatives trading and clearing as its biggest competition concern.

The combination of the two companies would create Europe's largest equity and derivatives exchange. The NYSE's roots trace back to the 18th century, while stock markets under the Deutsche Boerse have a history that the company traces to the 16th century, according to its website.

Concerns about the merger by regulatory authorities hinge on whether competitors would be able to access the clearinghouse to process derivatives trades that would come as a result of the merger. Clearing, a key piece of the 2010 Dodd Frank Act reform derivative of markets, lessens the credit risks of trading counterparts to the wider financial system -- and is seen to be a new profit center for exchanges.

Currently, NYSE Euronext owns derivatives trading business NYSE Liffe and Deutsche Boerse is owner of Eurex, a similar platform. Both provide for trading of derivatives based on interest rates, bonds, equities, indices, commodities and swaps, as well as clearing functions.

Today's news signals that both exchanges are going to allow rivals to access their clearinghouses, in a move to stem anti-competitive concerns. That move, along with a sale of equity derivatives units is seen by NYSE and Deutsche Boerse as the cure. "Eliminating the existing overlap in European single equity derivatives and ensures continued competition in European interest rate and equity index derivatives," both companies said in a statement Friday.

The $9 billion deal between Deutsche Boerse and the leading U.S. stock exchange announced in February isn't the only deal that's come under regulatory scrutiny. In August, the U.S. Department of Justice filed an antitrust lawsuit against AT&T's ( T)proposed $39 billion merger with T-Mobile.

Earlier in the year, Nasdax OMX Group ( NDAQ) and IntercontinentalExchange ( ICE) walked away from a similar merger because of a potential antitrust lawsuit from the U.S. Department of Justice.

While building a 'vertical silo' where trading and post-trade clearing could be affected under one roof was part of NYSE's strategy to merge with Deutsche Boerse, it was also struck in part to ward off the growing threat of high-frequency trading done off of traditional stock exchanges.

When the deal was announced in February NYSE Euronext Chief Executive Duncan Niederauer said, "The increasing globalization and interconnectedness of capital markets, and the rapidly growing presence of alternative trading venues that operate with less transparency and far fewer regulatory requirements, will position the new company as a true global player well placed to drive the long-term strength and competitiveness of transparent and regulated markets."

After learning of increasing scrutiny by European regulators this summer, Niederauer said on his second quarter analyst call that he still expected the merger to close by the end of 2011 and added "it's important to note that any negative impact on competition is not significant, given the global nature of derivative markets, the increasing competition between OTC and listed markets generally and in derivatives specifically." Friday's annoucement appears to recognize some competition concerns and is a step back from the stance.

The European Union has until mid-December to make a final decision on whether to approve or block the merger.

SABMiller said that after increasing its offer for Foster's Group Ltd. in October to get the company to agree on a merger, it will once again raise its bid, now pushing the deal over A$10 billion. The price increase was needed after the merger wasn't able to pass Australian tax reviews. Instead of paying an A30 cent dividend to shareholders after the merger, SABMiller will instead, add it to the takeover price - boosting chances of final approval.

SABMiller -- the international beer conglomerate that owns U.S. light beer favorite Miller Lite will now pay A$5.40 in cash to buy Australia's Fosters. According to the company's website, the addition of Fosters will provide its first entry into Australia, the only continent where it doesn't have existing brands.

Previous to the board approval of the deal, Fosters management rejected SABMiller's first A$4.90 a share takeover attempt in June, saying, "The value (of the bid) was so far from reality, it wasn't worth engaging." SABMiller then took their offer to buy the company directly to shareholders in a hostile takeover attempt this summer.

In October, the Brazilian news agency IG reported that Anheuser-Busch InBev ( BUD) is interested in buying SABMiller for as much as $80 billion according to anonymous sources. That merger would put InBev, the world's largest beer maker, together with SABMiller, the second largest.

In a statement Friday, SABMiller said, "If approved by shareholders at the relevant scheme meetings later this year, SAB Miller continues to expect the acquisition to be completed before the end of 2011."

-- Written by Antoine Gara in New York

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