CME CME Group Inc

By Eyk Henning in Frankfurt, and Shayndi Raice and Giles Turner in London 

London Stock Exchange Group PLC and Germany's Deutsche Börse AG agreed on Wednesday to create Europe's biggest stock exchange operator that would pose a formidable challenge to larger U.S. rivals.

The agreement, which would create a $30 billion company by market value, now sets the stage for a potentially ferocious bidding war, as U.S. competitors like Intercontinental Exchange Group Inc. and CME Group Inc. consider their next move.

Rival bidders appeared soon after LSE and Deutsche Börse said last month they were in talks about a combination. ICE, operator of the New York Stock Exchange, said it was considering a bid for LSE. A spokesman for ICE declined Wednesday to comment beyond the company's previous statement. Other potential deal-crashers include CME Group Inc., which The Wall Street Journal previously reported was also considering a bid, and Hong Kong Exchanges & Clearing Ltd., which said previously it is closely watching the discussions between LSE and Deutsche Börse.

Shareholders of both companies said they are expecting a rival to jump into the fray. Wednesday's all-share merger leaves room for ICE to counter with a more tempting cash bid.

"We don't want a full share deal," said one large U.K.-based LSE shareholder.

"We would expect some cash" from an ICE bid.

For the merger to go through, at least 75% of shares in Deutsche Börse need to be tendered, while at least 75% of LSE shareholders need to vote in favor of the deal.

If completed, the European exchange deal would generate about EUR450 million ($499.9 million) of cost savings while boosting revenues, the companies said. However, they said the cost savings will require an initial investment of EUR600 million.

The figure, which is above what most analysts expected, would allow Europe to push back against U.S. competitors. Those rivals have increasingly mounted challenges to Europe's exchanges on their own turf, particularly in the derivatives market with instruments such as futures and options that command higher margins and are harder for rivals to replicate.

"It is the right time to make such a transformational deal," Deutsche Börse Chief Executive Carsten Kengeter said.

But the timing is also potentially sensitive, as the U.K. gets set to vote later this year on whether or not to leave the European Union. Exchanges have long been a focus of national pride.

Mr. Kengeter said the terms of the deal won't be changed if the U.K. votes to leave the EU.

However, the companies have created a referendum committee to examine the "ramifications" of the U.K. leaving the EU. The companies admitted that "the outcome of that vote might well affect the volume or nature of the business carried out by the combined group." Joachim Faber, the Deutsche Börse chairman, will lead the committee.

The deal would also undergo significant antitrust scrutiny by the EU and local supervisors. The EU in 2012 blocked a proposed union of Deutsche Börse and NYSE Euronext.

The linkup is dependent on receiving competition clearance from the EU, U.S. and Russia. The exchanges have already begun discussions with a number of regulators.

If merged the entity, will be 45.6% owned by LSE shareholders and the rest by Deutsche Börse shareholders.

The combined company will have more than 10,000 employees and over 3,200 companies listed on its markets, with a joint market cap of EUR7.1 trillion, as of year-end 2015. The combined total income of EUR4.7 billion in 2015 means the new entity would be the world's biggest exchange group.

The combined company will be led by Deutsche Börse's Mr. Kengeter as CEO, while LSE Chairman Donald Brydon will chair the board. The LSE's Chief Financial Officer David Warren will be the group's finance chief.

On completion, LSE CEO Xavier Rolet will step down but become adviser to the chairman and deputy chairman to assist with a successful transition.

The newly created exchange would be domiciled in London with a head office in both London and Frankfurt.

Both companies have hired a battery of financial advisers to ensure the deal goes through. Deutsche Börse is working with Perella Weinberg Partners LP, Deutsche Bank AG and Bank of America Corp., while LSE is advised by Robey Warshaw LLP, Goldman Sachs Inc. and J.P. Morgan Chase & Co., among others.

Ulrike Dauer in Frankfurt and Ian Walker in London contributed to this article.

Write to Eyk Henning at eyk.henning@wsj.com, Shayndi Raice at shayndi.raice@wsj.com and Giles Turner at giles.turner@wsj.com

(END) Dow Jones Newswires

March 16, 2016 10:02 ET (14:02 GMT)

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