The London Stock Exchange Group (LSE.L) said a potential merger with Deutsche Boerse (DB1Gn.DE) would be "compelling" as potential rival bidders line-up for the British company which reported a jump in profits on Friday.
The group, which owns Borsa Italiana and the London Stock Exchange, said detailed discussions with Deutsche Boerse were ongoing over a deal to create a pan-European trading house with substantial revenue and cost benefits.
LSE and Deutsche Boerse said last week they were in merger talks, although New York Stock Exchange owner Intercontinental Exchange (ICE.N) has raised the prospect of a bidding war by saying it was considering making a counter-offer.
Deutsche Boerse and the London Stock Exchange are making a third attempt at creating a European trading powerhouse to take on U.S. rivals encroaching on their turf.
Nearly 16 years after their first merger attempt, the London and Frankfurt exchanges are discussing an all-share deal giving Deutsche Boerse shareholders a 54.4 percent stake and LSE shareholders 45.6 percent of a new company.
It would combine the LSE's share-trading operation with the derivatives trading of Deutsche Boerse's Eurex in a group worth almost $30 billion. It would give the companies similar scale to U.S. exchange ICE (ICE.N), which has taken a huge slice of the European derivatives markets.
LSE CEO Xavier Rolet, speaking to reporters on a conference call, promoted the potential tie-up as a true 'merger of equals', with a British-based holding company and a unitary board. But Rolet, who will step aside should the deal with Deutsche Boerse succeed, would not comment on any prospective interest from ICE.
The LSE reported a 31 percent increase in full-year adjusted pretax profit to 643.4 million pounds ($910.8 million) from 491.7 million pounds a year earlier, just shy of analysts expectations.
"A small miss on results, combined with a lack of material new information on the deal is likely to weigh slightly on the shares this morning," analysts at Exane BNP Paribas wrote in a note.
LSE shares were down 1.14 percent by 0930 GMT versus a 0.44 percent rise in the broader London market.
Revenue rose 78 percent to 2.28 billion pounds. Revenue includes both continuing and discontinued operations and excludes unrealised gains and losses for 2014 at LCH.Clearnet.
Revenue fell short of forecasts for 2.396 billion pounds, according to Thomson Reuters I/B/E/S.
"We continue to favour LSE's strong market position, favourable growth drivers and diversified revenue base, but until we gain further details on how a deal could be structured, we maintain our Hold recommendation due to concerns a deal may yet fall through," wrote analysts at Numis.
Regulatory concerns about the concentration of power in the hands of a few exchanges, along with nationalist wrangling, have hindered many cross-border deals in the sector.
LSE and Deutsche Boerse are already walking a political tight-rope between London and Frankfurt - trying to make sure both governments are on board with the deal, and that it would still make sense were Britain to leave the European Union.
But political and regulatory demands may be even more challenging if a non-European exchange tries to buy LSE.
Alongside ICE, CME Group (CME.O) is actively considering doing so, people familiar with the matter have said. Analysts suggested that Euronext NV (ENX.P)) and Hong Kong Exchanges and Clearing (0388.HK) may also be interested.
The company proposed a higher final dividend of 25.2 pence per share, implying a 20 percent increase in the dividend for 2015.
(Reporting by Noor Zainab Hussain and Esha Vaish in Bengaluru, Anjuli Davies in London,; Editing by Alexander Smith and Jane Merriman)