* Merger could value combined company at $11 bln-report
* SGX takeover of smaller LSE seen most likely
* Potential deal would be latest in global exchange consolidation
* Any deal likely to face regulatory hurdles
* SGX shares rise 0.6 pct
By Stephen Mangan and Rachel Armstrong
LONDON/SINGAPORE, July 20The London Stock Exchange Group is in talks with the Singapore Exchange about a potential 7.2 billion-pound ($11.3 billion) merger, the Daily Telegraph reported, in a deal likely to face tough regulatory scrutiny.
Mergers between exchange firms around the world have been happening thick and fast in recent years as traditional operators try to cut costs and boost their offerings to fend off growing competition from alternative trading platforms and so-called "dark pool" operators that link anonymous buyers and sellers.
The chief executive of LSE Group, Xavier Rolet, has held a series of informal talks with SGX Chief Executive Magnus Bocker about a potential merger, the Telegraph said in an article published on its website on Thursday, without specifying where it got the information.
"There will be synergies if there is any acquisition or merger as both of the exchanges work in different time zones," said Leng Seng Choon, an analyst at broker DMG & Partners Securities Pte Ltd. "They recently had this cross-border trading agreement which suggests they are on friendly terms."
A deal combining the two bourses would behind NYSE Euronext and Nasdaq OMX in terms of number of trades, but a takeover of Europe's oldest independent bourse could run into stiff regulatory and political opposition.
While the structure of any potential merger is unclear, the newspaper speculated that SGX would take over its British rival because of its larger market capitalisation.
"The two boards will be super-cautious is considering any proposal given the history of failures," said a source familiar with SGX's thinking who was not authorised to speak to the media. "It is not impossible, but the regulatory challenges will stand in the way of any deal."
A SGX spokeswoman said the company would not comment on the report or a potential merger with LSE, while the British firm did not immediately respond to request for comment.
The talks, still in their preliminary stages, are focused on the benefits of merging the two exchanges amid continued consolidation attempts in the sector, the Telegraph said.
"The only strategic rationale I can see is the global derivatives offering through an around-the-clock futures trading platform. There are some other potential benefits, such as IT synergies, but see it as reasonably tenuous," Credit Suisse analyst Arjan van Veen said. "The regulators would likely want clearing to be done in their own countries."
Banking sources quoted by the Telegraph said any form of formal offer was still some time away. The paper cited market rumours that suggest a takeover would be in the region of 13.50 pounds per LSE Group share -- a 32 percent premium to LSE's Thursday close.
Based on Thursday's closing prices, SGX is worth $5.7 billion, while LSE is worth $4.2 billion, making a combined market capitalisation of $10.1 billion.
The sector has been one of the most active for M&As in the past decade, but some centres have balked at handing over control of their stock exchanges to foreign companies. The European Commission this year blocked the $7.4 billion merger of NYSE Euronext and Deutsche Boerse, and the LSE itself, under previous CEO Clara Furse, fought off a host of unwanted takeover attempts in the 2000s.
SGX's largest shareholder with a 23 percent stake is a state-backed fund, a factor in the failing of SGX's last takeover attempt.
SGX and its acquisitive CEO Bocker made an $8 billion bid for Australian stock exchange operator ASX Ltd, but the attempt was dropped in 2011 after opposition from the Australian government.
A combination of the SGX and the LSE was touted as a potential alternative at that time and the two have since been building closer ties.
This month, SGX and LSE signed an agreement to allow the pair's largest stocks to be traded on both bourses, increasing access for investors and boosting liquidity.
A consortium including LSE and SGX bid for the London Metals Exchange earlier this year but failed to get past the first round. The LME was eventually bought by Hong Kong Exchanges and Clearing Ltd (HKEx), the operator of Asia's bourse, for what analysts said was a rich $2.2 billion.
SGX's Bocker made his name stitching together seven Nordic bourses to create OMX, later sold to NASDAQ, before moving to Asia.
Earlier this month, the C$3.8 billion ($3.72 billion) acquisition of Canada's TMX Group cleared its final regulatory hurdles.