Investors bet on US interest as stock exchange merger falters
Shares in the London Stock Exchange fell less than expected after it warned that its £24 billion merger with Deutsche Börse would not get approval from the European Commission as a result of a late intervention by the competition authorities in Brussels.
In a statement to the market the LSE said that it had been told that it must sell off its Italian bond trading exchange in order to get approval, a concession that it rejected, leaving the deal in limbo.
Despite expectations that LSE shares would fall by a much as 7 per cent, they fell only 1.1 per cent to £30.90 as investors weighed up the prospect that the tie-up with its Frankfurt-based rival might be off and mulled suggestions that it could open the way for US rivals to return; Intercontinental Exchange had been interested but ruled itself out.
The LSE owns a majority stake in MTS, an Italian government bond trading platform, and the commission said that for the deal to proceed the exchange must sell off the business, a finding described in a statement to the market as “disproportionate”.
The exchange said: “Taking all relevant factors into account, and acting in the best interests of shareholders, LSE board today concluded that it could not commit to the divestment of MTS.”
On the Frankfurt market shares in Deutsche Börse fell 2.4 per cent to €79.71.
John Colley, a professor at Warwick Business School, said that concerns from other EU countries about the implications of the merger appeared to have scuppered the deal.
He said: “Escalating requests from countries and particularly France suggest concerns that Frankfurt would be too great a beneficiary from the Brexit fallout. This would be at the expense of France and Paris in particular, who would expected to pick up significant trade from Brexit without the merger.”
The commission had given the exchange a deadline of 11am today to confirm that it would sell MTS but the LSE said that it would not meet this. In its statement it said: “Based on the commission’s current position, LSE believes that the commission is unlikely to provide clearance for the merger.”
It said that MTS, a leading platform for European wholesale government bonds, was a “systemically important regulated business in Italy due to its significant role in the trading of Italian government bonds and other securities”.
The exchange said that any “change of control of MTS would require, in particular, the approval of the Italian authorities and would trigger parallel regulatory approval processes in other jurisdictions, including the UK, Belgium, France and the USA”.
It said that after talks with Italian authorities, it was “highly unlikely that a sale of MTS could be satisfactorily achieved, even if LSE were to give the commitment”.
The exchange said that with Deutsche it had offered an improved “clear-cut structural remedy” in addition to the divestment of the French part of LCH’s business in an effort to meet Brussels’ demands but that this had been rejected by the regulators. The LSE had lined up Euronext to buy the French clearing business.
A source close to the exchanges said that the impasse had been caused by Franco-Italian politics, with neither government able to agree a remedy.
It is a deadlock that puts the merger in jeopardy, an outcome that will be cheered by some in the City. Last week 40 Eurosceptic City figures wrote a letter to The Times calling for the merger to be delayed until after Brexit negotiations.
A spokesman for Theresa May, the prime minister, told Reuters that the merger was a commercial matter.
The deal was struck before the Brexit vote and has been approved by shareholders but many in the City believe that the EU referendum has drastically altered the logic of the LSE becoming the junior partner in a merger.
Deutsche would control 54 per cent of the business, with the signatories to last week’s letter fearing that Frankfurt might try to grab London’s lucrative euro-clearing business.
Even Xavier Rolet, the LSE boss who had planned to step aside for the merger, warned that losing euro clearing could cost 100,000 jobs.
In Germany there has been opposition to Britain being the headquarters for the business. There has been opposition in the state of Hesse. Some also believe that an insider-trading investigation into a €4.5 million share purchase by Carsten Kengeter, the Deutsche boss, was politically motivated.
Shares in LSE were trading at about £23 a share before news of the tie-up with the Börse leaked last February.