Cozy ties between Spain and Switzerland led to an agreement to merge their stock exchanges. Will it be enough to see the $3.1 billion deal through as the threat of a takeover battle looms?

Zurich-based SIX landed a coup by winning Spanish backing for its $3.1 billion takeover of Bolsas y Mercados Españoles, or BME. After months of talks and several trips to Madrid, SIX was taken aback to learn its Spanish counterparts had also been in talks with Euronext at the same time, according to a source working on the deal.

The threat of a counteroffer from the pan-European giant looms, as finews.com reported on Tuesday. The Amsterdam-based company has made bolting on smaller European exchanges including Oslo and Dublin part of its plan (Euronext itself is the product of a 2000 deal between French, Belgian, and Dutch exchanges).

Investors Smell Battle

Euronext CEO Stephane Boujnah has repeatedly emphasized dealmaking as a key tenet of the company’s strategy – and investors appear to be betting on a takeover battle. BME’s stock already trades more than 4 percent over SIX’s takeover offer of 34 euros per share.

The pan-European exchange undoubtedly has the financial firepower to match SIX’s all-cash offer. The Swiss are splashing out a 50 percent premium on BME's closing on Friday at 25.40 euros.

No Due Diligence

The question is whether it makes sense to try and pip the deal agreed: Euronext would be challenging a friendly deal which is backed by BME’s management and board – a risky proposition.

«It’s not only about the price: the culture, philosophy, similarity of structure, and past relationship plays a strong role,» a person familiar with the matter said. The deal is the culmination of a two-year «focus» by SIX which began with the disposal of its payments arm and continued with the build of a blockchain-based exchange, SDX.

To be sure, SIX has also taken considerable risks: the Swiss exchange and adviser Credit Suisse haven’t conducted formal due diligence on BME, according to a source familiar with the deal. The Swiss bourse details revenue and infrastructure synergies as a major pillar of its logic in its bid for BME, which is publicly listed.

Vaulting Past Rivals

The plan, orchestrated by SIX Chairman and former Credit Suisse banker Romeo Lacher, would vault SIX into the top-three in Europe by profit and revenue, after London and Frankfurt but ahead of Euronext. His biggest ally is SIX CEO Jos Dijsselhof, who was operating chief to Euronext's Boujnah for three years before joining SIX.

Barring an about-face by the BME, the Swiss deal has the highest likelihood of succeeding: Madrid and Zurich, as smaller exchanges, have long been friendly, and have a nearly identical integrated trading structure. The Swiss hands-off approach will go over well in Spain, where the takeover is a matter of some political sensitivities, besides the usual regulatory interest.

Fragmented Landscape

Just last week, Spain formed a coalition government amid a fractured parliament, but effectively the country won’t have a government before Christmas. SIX has promised to preserve BME’s independence, for example, and its brand, current business activities, headquarters, office locations and strategy in Spain.

Even if a BME tie-up – with either SIX or Euronext – comes to fruition, Europe will still be home to 19 exchanges. In other words, enough table scraps for either Euronext or SIX to keep adding on.