The LSEG board pushes back on a divestiture stipulation of the European Commission, which could quash the merger.
The proposed merger between the London Stock Exchange Group (LSEG) and Deutsche Börse AG may have hit a major barrier because the LSEG board has rejected a stipulation from the European Commission (EC) that the London conglomerate divest its majority stake in the MTS electronic trading platform for European wholesale government bonds and other fixed income securities.
EC officials are asking for the divestment because of concerns over a trading and clearing monopoly that may be created by the combination of the LSE and Deutsche Börse empires.
LSEG officials issued their objections late Sunday night (February 26) in an update on the EC Phase II proceedings, and on the eve of a requirement that both parties to the merger “formally submit a remedy proposal for the divestment of LSEG’s majority stake in MTS by 12pm (CET) on Monday, 27 February 2017.”
The submission of a remedy proposal will not be happening.
“Taking all relevant factors into account, and acting in the best interests of shareholders, the LSEG board today concluded that it could not commit to the divestment of MTS,” according to the LSEG update. “LSEG will therefore not be submitting a remedy proposal with respect to MTS. Based on the commission’s current position, LSEG believes that the commission is unlikely to provide clearance for the merger.”
The EC concerns over the MTS connection emerged on February 16, after the Deutsche Börse and the LSEG began the process of selling in an “irrevocable all-cash offer” to exchanges conglomerate Euronext all of LCH.Clearnet Group Ltd., a central counterparty clearinghouse (CCP).
The Euronext sale was seen as a way to advance the merger between the LSEG and Deutsch Börse because it would ease concerns that the combination would greatly hamper competition among trading and clearing venues. But the EC “unexpectedly raised new concerns about the viability of the LCH SA remedy” because of concerns over access to “bond and repo trading feeds currently provided by MTS,” according to LSEG officials.
“As announced on 7 February 2017, the Commission began a period of market testing based on LSEG’s and Deutsche Börse’s submitted commitments, comprising of the proposed sale of LCH SA to Euronext N.V.,” LSEG officials say.
“The merger parties presented an improved and clear-cut structural remedy to complement the divestment of LCH SA, which addressed the Commission’s specific concerns,” according to the LSEG. “This improved remedy was, in the parties’ view, effective and capable of ready implementation, but it was rejected by the Commission. Instead, the Commission required that the parties commit to the divestment of LSEG’s majority stake in MTS to secure merger clearance.”
LSEG officials, who say the EC’s MTS remedy is disproportionate, argue that MTS is “not on its own a major contributor to LSEG Group revenues.” But the group’s Italian businesses “represent a significant proportion of LSEG Group revenues and profitability.” In addition, changes to the control of MTS would require the approval of the Italian authorities and “would trigger parallel regulatory approval processes” in the U.K., Belgium, France and the U.S.
“Following dialogue with Italian authorities about the commission’s required remedy and given prior discussions between the principals and Italian authorities regarding LSEG’s Italian businesses in the context of the merger, the LSEG board believes that it is highly unlikely that a sale of MTS could be satisfactorily achieved, even if LSEG were to give the commitment,” according to the LSEG update.
In addition, the LSEG board says an MTS divestiture could harm LSEG’s “critically important relationships” with regulators and could hurt LSEG’s “ongoing businesses in Italy and the Combined Group, were the Merger to complete.”
The MTS is a “systemically important regulated business in Italy due to its significant role in the trading of Italian Government bonds and other securities,” according to the LSEG.
While the LSEG board’s refusal to sell MTS may kill the merger, it still holds out a little hope that the combination could happen.
“Nevertheless, the LSEG board remains convinced of the strategic benefits of the merger and recognizes the strong support from shareholders for the transaction,” according to the statement from the LSEG, which will be pushing to implement the merger.
“In addition to commission clearance, the merger is conditional on regulatory clearances from Italian regulators and all relevant regulators including the Bank of England, FCA, BaFin and the Hessian Exchange Supervisory Authority (HESA), as well as all other relevant regulators and authorities in all other countries in which LSEG operates,” according to the LSE. “While discussions are being progressed with a number of these regulators, the regulatory process has not yet been concluded and formal engagement has not yet begun with HESA.”
EC officials have not yet responded to the LSEG’s board’s decision.
Need a Reprint?