Written By: Matthew Hemmings – Corporate Finance
For more than a year, the London Stock Exchange and Deutsche Börse have been working on a merger project, which would place the new entity at first place on European markets, with exceptional strength on derivatives markets and clearinghouses. While Brussels will make its decision on this €29 billion union on April 3, the chief executive officer of the London Stock Exchange (LSE), Xavier Rolet, announced in February that this merger was highly unlikely to happen, taking into account last-minute requests of the European Commission (EC).
The conditions of the merger, set by the European Commission, are said to be unacceptable.
Investors find it strange that the conditions quoted would impede the merger. Indeed, the EC had already asked the LSE to sell the French arm of clearinghouse LCH.Clearnet SA, and this had not been refused; Euronext could have been a potential buyer. The supplementary condition quoted by Xavier Rolet as being not acceptable was the sale of its 60-percent stake in Italian subsidiary MTS, an Italian bond-exchange platform used to trade Italian government bonds. MTS has only an EUR 60 million turnover and represents 4 percent of the turnover of the LSE. But after two days of emergency meetings of the LSE board of directors, the verdict fell: there is no option of selling MTS. The LSE said that this platform was of “systemic importance”.
Is there a hidden political reason?
In fact, Brexit has significantly changed the strategical landscape for the London Stock Exchange. Questions on the possible location of the new merged entity after Brexit have come to the fore. Deutsche Börse was said to be likely to take the lead and transfer part of the LSE activities to Frankfurt so that they would remain in the European perimeter. British parliamentarians voiced their concerns about the departure of foreign finance from London. On its side, the Hessian authority, which exercises oversight over Deutsche Börse, may have intended to veto the implementation of the leading holding company of the future stock market giant being in London. However, one recognises that any transfer of activity would have been highly costly.
The business discussions between the two actors have probably been troubled by political considerations. The UK’s prime minister, Theresa May, would have been under pressure for impeding the facilitation of trade migration to the EU (European Union). French lobbyists could also have been led to obstruct the merger. The temptation, therefore, may be to put on the back of Brussels the failure of a merger that politicians no longer want. In Germany, Deutsche Börse CEO Carsten Kengeter remains backed by the board, but is under investigation for insider trading as part of the merger.
Is the LSE still working on a merger?
Since February’s declaration, the London Stock Exchange’s CEO announced a net profit of £151.9 million ($186.8 million) for 2016, down from £328.3 million the previous year, although gross profit rose by 7 percent to £1.52 billion from £1.32 billion. Total income is up by 17 percent from £1.4 billion to £1.7 billion. Dividends rose 20 percent, with shareholders to receive 43.2p per share. Looking at the numbers, Xavier Rolet declared, “Each of our business areas delivered year-on-year growth, highlighting the strength in the diversity of our business”. The LSE said it continues to work hard on its proposed merger with Deutsche Börse.
The stakes are high for Europe, with American and Asian knocking at the door.
Indeed, Europe’s capital markets are very fragmented today. With the LSE, Deutsche Börse, Euronext (the result of the merger of the Paris, Brussels and Amsterdam stock exchanges) and Euroclear, the ability to face US and Asian competitors remains fragile. More synergy in costs and mergers of capital available to face the risks and future development would be welcome for the Eurozone. The strategic risks for the zone include that of the US and Asia attracting more global business, leaving Europe and the UK behind.
If this merger does not occur, the LSE’s potential fragility could whet the appetite of one of the major American exchanges, in particular Atlanta-based Intercontinental Exchange (which includes the New York Stock Exchange).CME Group, a US stock exchange, may also be a potential buyer. The Nasdaq, already owner of Scandinavian scholarships, could have some interest in buying the LSE. The possibility of an American stock exchange buying the London Stock Exchange has already been discussed and could make sense for London after Brexit. Europe could well lose the advantage in such an event.