VZCZCXRO3085
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #3447/01 1421612
ZNR UUUUU ZZH
R 221612Z MAY 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 7681
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 PARIS 003447 
 
SIPDIS 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR/WE 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV FR
SUBJECT:  EURONEXT: WHAT'S BEHIND THE CONSOLIDATION OF EUROPEAN 
STOCK EXCHANGES 
 
 
¶1. SUMMARY.  EURONEXT, the Paris-based pan-European stock market 
that is poised to accept a merger offer from the NYSE, has been 
jockeying for a major merger operation for some time.  EURONEXT's 
shareholders, the Paris financial community, and the French 
government all have an interest in maintaining the role of Paris as 
a major financial center.  This cable examines those motives.  END 
SUMMARY 
 
EURONEXT Leads Simultaneous Talks with Stock Exchanges 
--------------------------------------------- --------- 
¶2.  Over the past 18 months, Paris-based EURONEXT, formed by the 
merger of Paris, Brussels, Amsterdam, and Lisbon stock exchanges, 
has been involved in merger talks primarily aimed at consolidating 
the European stock exchanges.  Last year, talks focused on merging 
or acquiring the London Stock Exchange.  In the last few weeks, two 
major shareholders, New York-based Atticus and London-based TCI, 
have pushed for the merger of EURONEXT with Deutsche Borse (DB) the 
Frankfurt-based stock exchange.  Atticus has significant stakes in 
EURONEXT, DB and NYSE.  EURONEXT authorities have been open to all 
options, only in the last few days closing a deal with the New York 
Stock Exchange (NYSE).  Euronext's chairman Jean-Francois Theodore 
said he would present all available options to shareholders at 
Euronext's May 23 annual general assembly. 
 
Euronext Shareholder Maneuverings 
--------------------------------- 
¶3.  One shareholder, Winchfield Holdings NV, made a proposal to 
pressure EURONEXT to merge with DB.  EURONEXT contacted its 
shareholders before May 23, urging them not to support the request. 
EURONEXT argued that a vote in favor of the DB option would hamper 
ongoing talks.  Euronext also warned it lacked enough details and 
clarity on the project to make an informed decision.  Two consulting 
agencies, Institutional Investors Services and Glass Lewis & Co, 
advised shareholders not to vote for the Winchfield Holdings 
resolution. 
 
¶4.  Twenty or so listed companies entered into a shareholders' pact 
to have a bigger say in the developments in EURONEXT's future. 
Orchestrated by Rothschild & Cie, the group includes large companies 
listed in the blue-chip CAC 40 (roughly the French equivalent to the 
Dow Jones Industrial Average or the S&P 500): Suez, Air Liquide, 
AXA, France Telecom, Schneider and Veolia Environment.  The group, 
which held a 5% stake in EURONEXT, hoped to ensure a future with a 
European touch. 
 
¶5.  Separately, Societe Generale, BNP Paribas, Credit Agricole and 
Dexia joined the state-owned financial institution Caisse des Depots 
(a shareholder with a long history), to form another shareholder 
pact.  The pact accounted for a 10.94% stake in Euronext and 11.06% 
of voting rights.  Fortis, ABN AMRO and Banco Espirito Santo, which 
were involved in initial discussions, decided not to join the pact. 
Fortis even sold its "non strategic" 3.5% share in EURONEXT.  That 
pact favors a large European market that would "increase liquidity 
and reduce costs for users within a safe and reliable system."  That 
group did not want EURONEXT to be forced to adopt DB's vertical 
structure that includes post-trading services, including clearing 
and settlement, nor to have the new consolidated European stock 
exchange move its headquarters to Frankfurt. 
 
 
¶6.  On April 21, the company that owns the Dubai stock exchange, the 
Dubai International Financial Center (DIFC) confirmed it had 
acquired a 1.67% stake in EURONEXT.  DIFC said on May 22 that it had 
raised it stake to 3.48%.  DIFC commented that investment has been 
made "with the full knowledge and agreement of the board and 
management of EURONEXT."  DFIC spokeman Charles Skeeles said "our 
investment in EURONEXT fits well with our long term strategy that 
consists in developing the Dubai center in addition of financial 
centers in Europe, in the U.S. and in Asia."  EURONEXT Dubai and 
EURONEXT already had ties through a technical cooperation agreement 
involving Atos EURONEXT Market Solutions. 
 
Paris Financial Community Wants to Keep its Role 
--------------------------------------------- --- 
¶7.  In April, Gerard Mestrallet, the Suez chairman and head of the 
Paris Europlace association, representing the major players in the 
financial market insisted "we are not opposed to a merger with DB, 
but conditions are not met."  Europlace members are well aware that 
EURONEXT controls a sizeable portion of the French financial 
community.  The community understandably fears Paris could lose its 
role as a financial center, since the proximity of a stock exchange 
historically has been crucial for growth of the financial sector. 
 
 
PARIS 00003447  002 OF 003 
 
 
¶8.  The French securities regulator (AMF), Euroclear and the 
Association of Financial Economics ("Association d'Economie 
Financiere") expressed the same worries in a conference attended by 
post's local economist.  Pierre de Lauzun, the general delegate of 
the French Association of Investment Companies (AFEI) said it was 
"necessary to be aware about the strong link between Paris Europlace 
(the financial community) and EURONEXT since the presence of a stock 
exchange has an impact on regulations."  He also warned that 
vertical structure of a stock exchange "does not allow any 
flexibility," arguing that clearing might take place anywhere, while 
delivery and settlement requires harmonized regulations.  Michel 
Didier, a member of the government "Conseil d'Analyse Economique" 
and also EURONEXT's scientific advisor, underlined that "proximity 
of a stock exchange was a source for efficiency for a financial 
center, and fit the logic of competitiveness poles."  Professor 
Bertrand Jacquillat and Dominique Leblanc from FinInfo acknowledged 
that consolidation of stock exchanges was inevitable, but stressed 
that the "clustering" effect specific to a financial community was 
beneficial to all users. Michel Prada, the head of AMF, agreed 
preventive measures would be necessary. 
 
Businessmen Call the Government to Intervene 
-------------------------------------------- 
¶9.  On April 27, Gerard de la Martiniere, the head of the Federation 
of Businessmen's Finance Commission ("Commission des Finances - 
MEDEF") stressed that international consolidation of stock exchanges 
was inevitable and desirable since "it will allow us to expand our 
financial resources and to reduce costs.  However, we have to defend 
our interests to keep a geographical proximity with the stock 
exchange."  MEDEF called on Finance Minister Breton to listen to the 
needs of a regulated market.  MEDEF also joined Paris Europlace and 
the French Association of Private Companies to invite the European 
Commission to play a central role by examining "competition 
conditions as soon as possible" and the "consequences of a possible 
transatlantic merger, notably at the regulatory level."  Separately, 
Belgian industry representatives emphasized the efficiency of the 
EURONEXT model that "allies economic advantages of an international 
stock exchange (scale savings, synergy of costs, and cross-border 
accessibility), maintains local identity, and allows developing 
capacity of local markets." 
 
Paris Europlace and the Ile-de-France Region Signs a Charter 
--------------------------------------------- ------- 
¶10.  Jean-Paul Huchon, President of the Ile-de-France region warned 
that "all countries that lost their financial industry declined" 
saying that the region, and Paris Europlace, were determined to 
protect and to reinforce its financial industry in order that "it 
remains a recognized financial reference at the European and 
worldwide levels."  He indicated that the financial sector in Paris 
accounted for 15% of regional GDP and 6.8% of employment. 
 
French and German Government Views 
---------------------------------- 
¶11.  Quizzed by the financial daily Les Echos, French Finance 
Ministry officials have said they "are vigilant, attentive to the 
Paris role.  Many financial market participants have expressed their 
interest in EURONEXT.  For sure, a merger with DB cannot be done at 
any cost."  On April 30, Finance Minister Breton stated that he was 
in favor of federated structure, as a vertical structure of a stock 
exchange was not adapted to European integration.  He said he would 
talk about this issue during the examination of the white book on 
financial services at the May 5 meeting of EU Finance Ministers. 
German Finance Minister Peter Streinbruck noted that "the 
capitalization of stock exchanges has to play a decisive role in a 
possible merger, and capitalization is a key factor in the selection 
of headquarters for the new consolidated stock exchange."  It is 
worth noting that DB has greater market capitalization (12 billion 
euros) than EURONEXT (8 billion euros). 
 
¶12.  DB posted 257 million euro operating profit in the first 
quarter, up 45% compared with the same period in 2005, a performance 
much higher than that expected by analysts.  Euronext announced that 
its first-quarter net profit has more than doubled, buoyed by strong 
trading in cash in Paris and derivatives markets on the LIFFE.  Net 
profit in January-March was 107 million euros, up from 45.3 million 
euros in the same period of 2005. 
 
Comment 
------- 
¶13. Although the merger with the NYSE is not what EURONEXT may have 
initially envisioned when thinking of European consolidation, it 
does fit into the interests of virtually all major French 
participants.  EURONEXT's shareholders would benefit from the cash 
 
PARIS 00003447  003 OF 003 
 
 
premium offered, and an opening into the U.S. markets.  Even if 
Euronext headquarters moved to New York, the French financial 
community and the French government believe Paris will remain an 
important international financial center.  Transatlantic regulatory 
supervision will, however, require a great deal of discussion.  The 
likelihood of other possible merger/alliance options will be 
examined in a separate message. 
HOFMANN