The London Stock Exchange Group Plc's offices in Paternoster Square in London, U.K., Jan. 2, 2020.
Simon Dawson/BloombergWhat’s a little government meddling, if that is the price to pay to secure a $27 billion deal? The London Stock Exchange Group has sacrificed a few hundred million dollars because it wants approval for its acquisition of financial-data giant Refinitiv.
The British bourse operator has entered into exclusive talks to sell its unit Borsa Italiana, Italy’s markets operator, to its French rival Euronext (ticker: ENX.France). The LSE (LSE.UK) has rejected higher bidders to appease Rome’s preference for that particular buyer. The upside for the British group is that the sale may unlock the Refinitiv deal.
According to media reports, Euronext had the lowest offer on the table, compared with those of German group Deutsche Boerse (DB1.Germany) and SIX, the Swiss Exchange operator.
The LSE will now have to explain to its shareholders that the Italian government favored Euronext as the next parent of the country’s stock exchange. Euronext is ready to make some room, both on the shareholders’ registry and on the board, for Cassa Depositi e Prestiti, the Italian state-owned investor.
It would be easy to cry foul and blame government meddling for the apparent loss inflicted on LSE shareholders. Borsa Italiana might be sold to the French group for some 3.5 billion euros ($4.1 billion), a few hundred million euros shy of rival offers. LSE bought the Italian stock exchange operator for €1.6 billion in 2007.
But look beyond the numbers, and Italy may have done the LSE and its shareholders a favor. LSE shares rose 1%, and Euronext’s jumped 4%, the day they announced they had entered exclusive negotiations. LSE’s stock is up about 12% this year, to 8,712 pence ($111.83), while Euronext’s has gained 37% to €99.
The main reason is that the sale of Borsa Italiana, which includes the company’s valuable MTS bond-trading platform, will help LSE win approval from the European Commission for its acquisition of Refinitiv from its current owners, investment-management firm Blackstone Group (BX) and Thomson Reuters (TRI).
The EU’s competition watchdog said in June it was launching an investigation into the deal, on concerns that it might lead to too much market power in the trading of government securities if MTS merged with Tradeweb, Refintiv’s bond-trading platform. The EU’s probe is expected to be over by mid-December. The sale of Borsa Italiana would help the LSE’s case.
The LSE was right to look beyond simple financial arithmetic for another reason. Exchanges have grown in size and power in the past 20 years. They are no longer branches of the state, and are listed companies on financial markets, where they prosper.
The LSE’s market capitalization, at more than 30 billion pounds sterling ($38.2 billion), dwarfs that of Euronext’s €7 billion. But both are highly valued, and both have seen their share prices double in the past two years. Euronext also operates exchanges in the Netherlands, Belgium, Portugal, Ireland, and Norway.
However independent and global they may be, those large bourse operators live in close proximity to regulatory authorities and, ultimately, governments. And governments’ intentions or preferences, even when they take the form of hard-to-ignore pressure, are just other market signals that global players have to reconcile with their own strategies. Governments have a duty to articulate what they want for their domestic financial markets. And it would be a bad calculation for the exchanges to ignore, let alone confront, them.
So, even though it may look like it is selling a valuable asset at a discounted price, LSE can defend the operation by showing its investors that without it, it might have to give up the Refinitiv acquisition—which is seen as crucial to its long-term strategy. As for Euronext, it can sell the deal to its shareholders by noting that it is paying a reasonable price, compared with what others were ready to pay.
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London Stock Exchange's Sale of Italian Unit Should Boost Its Stock - Barron's
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