EU blocks £21bn LSE-Deutsche Boerse merger
Anti-trust regulators veto deal a month after London Stock Exchange refuses to sell Italian bond arm MTS
A 15-month effort to bring together the main stock operators in London and Frankfurt has been scuppered by the EU competition watchdog, says the Financial Times.
It was revealed in February 2016 that talks were ongoing between the London Stock Exchange and Deutsche Boerse over a £21bn "merger of equals".
The tie-up would have combined Europe's two largest stock exchange operators, with operations beyond their home markets in France, Italy and around the world, and created a global markets business capable of standing toe-to-toe with rivals in Asia and the US.
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However, EU anti-trust regulators today vetoed the deal, saying in particular that it would have created "a de facto monopoly in the crucial area of fixed income instruments" – a reference to the markets for corporate and government bonds, which are a key part of most investors' portfolios.
European Commission officials last month asked the LSE to sell its Italian government bonds arm MTS to clear a path for approval. The exchange, which had already agreed to offload its French clearing house to rival Euronext for €510m (£440m), refused, effectively confirming that the Deutsche deal was doomed to fail.
Analysts even said LSE was willingly allowing the transaction to collapse as it knew Brexit had removed political support.
"The finely weighted deal was severely unbalanced by the UK's vote to leave the EU last June," says the FT.
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"It had been calibrated to allow for decision-making in London, Frankfurt and Milan, where the main market infrastructure is also owned by the LSE.
"Brexit radically altered the public debate on key issues such as the location of the combined group’s headquarters, and clearing, which ensures trades are completed if one party in a deal defaults."
Several LSE shareholders felt the rationale for the deal no longer stood up in the wake of the Brexit vote and urged it to be put on hold while negotiations between the UK and EU took place.
LSE's share price today certainty suggests investors are happy with the outcome: it is up 2.7 per cent to £31.05 in an otherwise flat market.
Who killed LSE-Deutsche Boerse merger?
28 February
Was it Germany, Italy or France that scuppered the deal – or had London bosses already decided it was doomed to fail?
Was it "an attempted land-grab by the French? Italian intransigence? Or was the German financial establishment… stirring the pot?" asks Nils Pratley in The Guardian.
Yesterday, it emerged that the London Stock Exchange's (LSE) year-long merger talks with German rival Deutsche Boerse appeared doomed to fail.
In a "surprise, late intervention by the competition authorities in Brussels", according to The Times, LSE was asked to sell its majority stake in its Italian platform for European government bonds, MTS.
However, LSE said it was not willing to do that and that as a result, the European Commission was "unlikely" to approve the Deutsche Boerse merger. A final decision is due by 3 April.
Bosses said they were not willing to compromise their relations with the Italian regulator as the country is a key source of business. The Times says it is "likely that MTS and Italian regulators would have sought to block a sale".
Officials in France are also being "blamed" by some, adds the paper, with sources suggesting Paris wanted one of its own to buy MTS just as it is acquiring LSE's France-based clearing business.
What of the Germans? There has long been a suggestion that, especially in light of Brexit, its establishment would have sought to oppose a deal that will see its main markets operator headquartered in London.
Both the Bank of England and the German state of Hess still have to approve the transaction, says the Globe and Mail.
Given all these competing interests, the Globe suggests LSE might have decided the deal was doomed to fail and so "the MTS issue was as good a moment as any to kill it rather than face more awkward battles".
Whoever is to blame, many UK financiers will be pleased: 40 City grandees wrote to the Times last week saying the deal should be blocked until the uncertainties of Brexit have been resolved.
Investors appear to agree. LSE's share price closed an less-than-expected one per cent yesterday and was essentially unchanged this morning at £30.87 a share.
LSE – Deutsche Boerse merger 'unlikely' after Brussels demands
27 February
The European Commission is "unlikely" to approve the long-anticipated merger between the London Stock Exchange (LSE) and its German equivalent, Deutsche Boerse, because of competition concerns, says the LSE in a statement today.
The LSE says the commission "unexpectedly raised new concerns" about the £21bn (€24bn) merger just two weeks ago, giving it until today to respond. It was an "eleventh hour demand", says the Daily Telegraph.
The EC wanted the LSE to sell off its key Italian electronic bond trading platform MTS before the merger. It's a stricture that's "disproportionate" and impractical, says the LSE, and likely to be detrimental to its business.
The LSE says MTS plays a "systematically important" role in the trading of securities including Italian government bonds, adding: "Based on the Commission's current position, LSE Group believes that the Commission is unlikely to provide clearance for the merger."
LSE refuses to play along
MTS is so important to its business, particularly in Italy, that the LSE has refused to put forward proposals to sell it off, despite the request from Brussels. The company says it's acting "in the best interests of shareholders" by not kowtowing.
The LSE's refusal to play along took Deutsche Boerse by surprise, according to the Telegraph – and by its own admission will scotch the merger.
This is the third time the two companies have tried to join forces, says the Telegraph. Attempts in 2000 and 2005 both "floundered" and the latest proposals have been "dogged by controversy" since the UK voted to leave the EU.
The German state of Hesse, which has the power to veto the deal because Deutsche Boerse is located in its territory, has demanded that the merged exchange should be based within the EU, despite proposals to base it in London.
To satisfy the EC, the two firms had already agreed that part of the LSE's clearing business, LCH, would be sold off before the merger of equals.
Insurmountable obstacle
The latest commission demand looks like an "insurmountable obstacle" to the merger, says the BBC's Dominic O'Connell.
He adds: "The LSE will either go it alone in a post-Brexit world, or – as has often seemed possible before, and even more so now – fall into the arms of one of the giant American exchanges."
The European Commission is expected to rule on the merger by the end of March.