The London Stock Exchange Group has been deliberating over a move to acquire global market data provider Refinitiv, so much so that early last month (October 9, 2020) it agreed to sell one of its largest subsidiaries, Borsa Italiana to Euronext for 4.325 billion EUR. LSEG announced towards the end of July of this year that it may sell part or all of Borsa Italiana, Italy’s only stock exchange, in hopes of securing regulatory approval for its 27 billion USD acquisition of Refinitiv.
LSEG is a global financial markets infrastructure business. Its diversified global business covers information services, risk and balance sheet management and capital formation. Through its platforms, the group offer market participants unparalleled access to European Capital Markets. The Group operates a broad range of international equity, ETF, bond and derivatives markets, including London Stock Exchange, Borsa Italiana and MTS (a European fixed income market). Borsa Italiana, the subject of the acquisition, organises and manages the domestic Italian market, regulating procedures for admission and listing of companies, and supervising disclosures for listed companies.
So, why does the LSEG want to sell Italy’s only stock exchange? The rationale behind the divestment is seemingly rather simple: to persuade EU competition authorities to sanction its purchase of Refinitiv. This is because the Refinitiv deal would turn the conglomerate into one of the world’s largest capital markets infrastructure operators with substantial control of major exchanges, indices and data. As a consequence, this raises competition concerns that the group could reduce fixed income trading competition levels. Subsequently, the LSEG said in early October that the divestment of Borsa Italiana would be a probable condition for clearance by the EU’s competition watchdog. This is partly because Borsa Italiana is the majority owner of a significant bond trading venue, MTS.
Despite higher bid offers from Germany’s Deutsche Börse and Switzerland’s SIX Group to win the Borsa Italiana deal, the LSEG chose to engage with Euronext. ‘Over the last 15 years, Euronext has become the consolidator of choice for the traditional local cash equity exchanges. They developed political connections, a unique skill set and specific processes.’ said Mark Yockey, portfolio manager at Artisan Partners. Expanding upon this, there is significant political sensitivity in Italy, where the government regards Borsa Italiana as an important national asset and key domestic financial infrastructure. As a result, Euronext submitted a joint bid with Italian Bank Intesa Sanpaolo and state-owned investor Cassa Depositi e Prestiti. As reported by the Financial Times, it is said that Euronext plan to maintain governance of Borsa Italiana in Italy and make an Italian its chairman, as these were supposedly two of the preconditions that Italy demanded to move forward with the offer. Overall, this is likely another key reason for the LSEG’s decision to enter an agreement with Euronext ahead of the other bidders, as it improves the feasibility that the deal will be completed successfully and within a sufficient timeframe.
There is also a clear rationale for Euronext to swoop in on the deal. Acquiring Borsa Italiana naturally aligns with Euronext’s strategy and would cement its position to create a leading pan-European market infrastructure. It would add to the already long list of stock exchanges that the group own. These include the main stock exchanges of Brussels, Amsterdam, Paris, Dublin, Lisbon and Oslo. Thus, this transformational combination positions the newly formed group to deliver the ambition of further building ‘the backbone of the Capital Markets Union in Europe’ while at the same time supporting local economies and attaining a more diversified global footprint (as seen in Figure 1).
Figure 1. Italy to represent 34% of the combined group revenue, further expanding Euronext’s footprint. Euronext 2020.
The acquisition also presents substantial long-term upside for Euronext. Firstly, it is expected that the combination will facilitate the realisation of 60 million EUR in annual pre-tax run-rate synergies in year 3. Breaking this down, 45 million EUR will be run-rate cost synergies, notably through leveraging combined group capabilities and the roll-out of Euronext’s Optiq® technology in Italy. There is also potential to achieve additional technology synergies through cooperation of their CSD businesses. Providing some context, Optiq® is Euronext’s state-of-the-art proprietary trading platform and a central securities depository (CSD) is an institution that holds financial instruments, including equities, bonds, money market instruments and mutual funds. Another 15 million EUR is expected to be realised through run-rate revenue synergies from cross-selling and growth opportunities. However, the restructuring costs to deliver these synergies are expected to amount to 100 million EUR. Finally, the transaction is expected to be immediately accretive before synergies on the adjusted EPS, and double-digit accretion is expected post run-rate synergies in year 3.
One key contingent that will ultimately determine the deal’s completion is the EU competition authorities’ decision. They now have until mid-January to make a ruling. This deadline initially stood at mid-December but was pushed back by a month to allow the competition authorities to examine LSEG’s new commitments to getting the deal secured. However, it is not certain that LSEG’s sale of Borsa Italiana will satisfy the competition watchdog, which could result in a synchronised breakdown of both the Refinitiv and Euronext deals. This is due to the fact that if LSEG’s acquisition of Refinitiv does not receive regulatory approval, then it no longer has a strong incentive to sell Borsa Italiana. Therefore, the short-term wait for a decision presents a significant risk to the deal.
Overall, as stated by Stéphane Boujnah, Euronext chief executive, ‘the combination of Euronext and the Borsa Italiana Group, with the strategic support of long-term investors such as CDP, delivers the ambition of building the leading pan-European market infrastructure, connecting local economies to global capital markets.’ Finally, this combination has the projected potential to simultaneously accelerate Euronext’s vision whilst also providing substantial long-term returns through both revenue and cost synergies.
By Benjamin Towle
Sector Head: Venkat Rajasingham
Figure 1: Italy to represent 34% of the combined group revenue, further expanding Euronext’s footprint. (Euronext 2020)
The acquisition also presents substantial long-term upside for Euronext. Firstly, it is expected that the combination will facilitate the realisation of 60 million EUR in annual pre-tax run-rate synergies in year 3. Breaking this down, 45 million EUR will be run-rate cost synergies, notably through leveraging combined group capabilities and the roll-out of Euronext’s Optiq® technology in Italy. There is also potential to achieve additional technology synergies through cooperation of their CSD businesses. Providing some context, Optiq® is Euronext’s state-of-the-art proprietary trading platform and a central securities depository (CSD) is an institution that holds financial instruments, including equities, bonds, money market instruments and mutual funds. Another 15 million EUR is expected to be realised through run-rate revenue synergies from cross-selling and growth opportunities. However, the restructuring costs to deliver these synergies are expected to amount to 100 million EUR. Finally, the transaction is expected to be immediately accretive before synergies on the adjusted EPS, and double-digit accretion is expected post run-rate synergies in year 3.
One key contingent that will ultimately determine the deal’s completion is the EU competition authorities’ decision. They now have until mid-January to make a ruling. This deadline initially stood at mid-December but was pushed back by a month to allow the competition authorities to examine LSEG’s new commitments to getting the deal secured. However, it is not certain that LSEG’s sale of Borsa Italiana will satisfy the competition watchdog, which could result in a synchronised breakdown of both the Refinitiv and Euronext deals. This is due to the fact that if LSEG’s acquisition of Refinitiv does not receive regulatory approval, then it no longer has a strong incentive to sell Borsa Italiana. Therefore, the short-term wait for a decision presents a significant risk to the deal.
Overall, as stated by Stéphane Boujnah, Euronext chief executive, ‘the combination of Euronext and the Borsa Italiana Group, with the strategic support of long-term investors such as CDP, delivers the ambition of building the leading pan-European market infrastructure, connecting local economies to global capital markets.’ Finally, this combination has the projected potential to simultaneously accelerate Euronext’s vision whilst also providing substantial long-term returns through both revenue and cost synergies.