The UK's Office of Fair Trading referred two rival proposals to buy the London Stock Exchange to the Competition Commission for an in-depth probe on Tuesday, a step likely to delay any take-over by six months. LSE shares sank 5 percent after the news as the prospect of a quick end to the protracted take-over battle receded further.
The OFT's move came at the end of a two-month look at rival plans by Deutsche Boerse and Euronext to acquire the LSE and create the world's second-biggest stock exchange after the New York Stock Exchange.
The OFT said in a statement it was referring both potential offers to the watchdog in relation to the supply of on-exchange trading services for equities in the UK.
OFT Chairman John Vickers said competition between exchanges in Europe had been episodic and that it needed to be investigated whether either merger would lessen future competition in equity trading in the UK.
"...the OFT considered that neither proposal was at this stage able to resolve all competition concerns in a sufficiently clear-cut manner, the OFT said.
Euronext has not yet made a cash bid and Deutsche withdrew its offer earlier this month but asked the OFT to continue its probe, saying it could make a fresh offer if Euronext or another party unveiled a firm bid.
The LSE and Euronext had no immediate comment on the OFT's decision. Deutsche Boerse said it looked forward to working with the Competition Commission, whose in-depth probe is expected to take until September 12.
"It just muddies the water a bit. I can't believe it wasn't expected by Euronext or Deutsche Boerse," said Justin Bates, an analyst at Numis Securities.
"Which ever way you look at it, the stock exchange should be taken out at about 550p a share. This just drags out the whole process," Bates said.
The OFT said it had a further worry about Deutsche Boerse's take-over proposal as it touched on Frankfurt's one-stop trading to clearing and settlement business model, referred to as a vertical silo in the industry.
"In respect of DBAG's (Deutsche Boerse) bid, additional concerns arise in relation to the supply of clearing services for equities trades in the UK," the OFT said.
Some LSE users have voiced concerns they would be forced to use Eurex Clearing and Clearstream, the in-house clearing and settlement units of Deutsche Boerse, if the Frankfurt exchange captured the LSE.
The LSE now uses LCH.Clearnet and Euroclear's Crest to clear and settle trades, as does Euronext, with no exchange holding a dominant stake in either.
Deutsche Boerse said it would have retained Crest but indicated it wanted hefty price cuts from LCH.Clearnet in return for renewing its clearing contract in the UK.
Last December, Deutsche Boerse offered 530 pence per share, or 1.3 billion pounds ($2.43 billion), to buy Europe's top equity market.
Boerse's offer was rebuffed twice by the LSE before shareholders of the Frankfurt exchange forced the offer to be scrapped.
Rival Euronext has yet to make a cash bid pending the outcome of anti-trust probes, which it says could have a substantial bearing on the structure of any deal.
By 1238 GMT, LSE shares were down 5.06 percent at 450p. Deutsche Boerse was down 1.2 percent at 58.85 euros, while Euronext traded down 2.22 percent at 27.28 euros. An index of the overall European market was off 0.2 percent.
Analysts have said that the LSE's fair value lies within the range of 370-390 pence a share were no bid to occur.