The straw that broke the camel’s back: How an Italian trading business put the London Stock Exchange-Deutsche Boerse merger in jeopardy
If the European Commission blocks the London Stock Exchange’s merger with Deutsche Boerse in the coming weeks, as is widely anticipated, the army of bankers, lawyers and other finance workers on the deal will immediately turn their attention to the body’s in-depth explanation.
As an example of what to expect, when the commission blocked the O2-Three merger last year, the only deal it formally obstructed in 2016, the press release announcing the decision came complete with diagrams setting out the issues.
Numerous tales, plausible and far-fetched, have been circulated in recent weeks to explain the apparent collapse of the stock exchange deal: German politicians flexed their muscles in Brussels because of concerns over the London HQ of the combined group; the London Stock Exchange was unhappy that the balance of the deal appeared to be tilting in Deutsche Boerse’s favour; there were concerns about the insider trading probe into the German company’s chief executive, Carsten Kengeter.
Read more: German minister accuses London Stock Exchange of "derailing" merger
But, through conversations with industry observers and half a dozen people close to the deal, City PM has established the details behind what one source described as “the straw that broke the camel’s back”: the London Stock Exchange’s Italian trading business MTS.
Remedies not enough
On Sunday 26 February, in a late-night announcement appearing to mark the end of the deal, the London Stock Exchange Group revealed that the commission had
unexpectedly raised new concerns about the viability of the LCH SA remedy in relation to access to bond and repo trading feeds currently provided by MTS S.p.A.
Translation, confirmed by sources spoken to by City PM: the London Stock Exchange had already agreed to divest its French clearing business, LCH SA, with pan-European exchange Euronext agreeing a €510m (£442m) takeover.
However, Euronext, which is part-owned by the French government, had become concerned that LCH SA would not be enough of a remedy, because the London Stock Exchange could divert MTS trading flows away from the clearing house.
The result was that the London Stock Exchange was told to sell MTS. Probably to Euronext. Some sources close to the deal said that the European Commission told the London Stock Exchange outright that it would need to sell MTS to Euronext, while others suggested it would have been less explicit. All agreed that the implication was clear.
The 26 February statement added:
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. This improved remedy was, in the parties’ view, effective and capable of ready implementation, but it was rejected by the commission.
City PM understands the London Stock Exchange, not wanting to sell MTS to Euronext, offered a commitment under which MTS trading would continue to flow through LCH SA. The stock exchange felt that this would offer a practical solution. The European Commission disagreed and, as the statement explains, rejected the offer.
A European Commission spokesman said: “The commission’s investigation in the case is ongoing. It has not taken a decision. The deadline for a decision is 3 April.”
Rival overplays its hand?
It is not clear whether Euronext, which declined to comment on this article, was consulted by the European Commission on the London Stock Exchange’s proposed remedy. But what is clear is that the exchange played a significant role in disrupting the merger.
Euronext chief executive Stephane Boujnah last year said the deal would create a “virtual monopoly” in the European exchange arena.
Behind the scenes, sources said Euronext was lobbying hard against the deal. Governments in France, Portugal, Belgium and the Netherlands, all countries which house Euronext exchanges, wrote to the European Commission speaking out against the tie-up last year.
One source speculated that Euronext’s apparent determination to disrupt the deal might have had an extra dimension: a personal rivalry between the French chief executives of Euronext, Boujnah, and the London Stock Exchange Group, Xavier Rolet.
Read more: London Stock Exchange fiasco does not bode well for post-Brexit Brussels
In January, after agreeing a deal for LCH SA, Boujnah told City PM that Euronext was in a win-win situation: either the deal went through and his company would soak up a new asset; or the deal would fall through.
It is difficult to ascertain which of these ‘wins’ was more important for Euronext. No doubt, though, that after devoting time and resources to winning the LCH SA bidding war, the company would rather have had both.
Boujnah is thought to still be keen on a deal for LCH SA. However, sources have suggested the London Stock Exchange would not be a willing seller, especially after the way its Deutsche Boerse deal broke down.
In the words of one source: “Euronext appears to have overplayed its hand.”