London Stock Exchange-Deutsche Börse Merger Suffers Potentially Terminal Setback

LSEG refuses European Commission’s antitrust demand to sell stake in Italian platform MTS, placing proposed merger in jeopardy.

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The proposed merger between LSEG and Deutsche Börse was first confirmed in February 2016 but has suffered numerous setbacks since.

The proposed merger between European exchange groups the London Stock Exchange (LSEG) and Deutsche Börse has been thrown into serious doubt after LSEG rejected the European Commission’s demands that it divest its majority stake in Italian government bond trading platform, MTS.

In a statement released on February 26, LSEG said it “could not commit” to a divestment of MTS, a regulated electronic trading platform for European wholesale government bonds and other fixed-income securities.

The European Commission had made the divestment recommendation in mid-February in conjunction with a previous requirement that LSEG sell its stake in French clearing house LCH SA. A deal to sell LCH SA to European exchange rival Euronext was announced in January this year.

“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,” said LSEG’s statement. “Moreover, the LSEG board believes the offer of such a remedy would jeopardize LSEG’s critically important relationships with these regulators and be detrimental to LSEG’s ongoing businesses in Italy and the combined group, were the merger to complete.”

LSEG has said that it will not propose a remedy to the European Commission’s demand and therefore “believes that the Commission is unlikely to provide clearance for the merger” with Deutsche Börse, but will continue its efforts to implement the deal.

A combined LSEG-Deutsche Börse entity would possess the clout to rival international exchange rivals such as Intercontinental Exchange (ICE) and CME Group in the US, but has met with continued resistance from European regulators and competitors, fearing the creation of a European exchange monopoly. The UK’s decision to leave the European Union also created tension between the two exchanges as to where the combined group’s headquarters would be located.

By rejecting the European Commission’s antitrust demand, LSEG looks to have walked away from the proposed merger, despite insisting that it would continue to look for ways to push ahead with the merger and remains convinced of its “strategic benefits.”

However, LSEG was also bullish on its own prospects should the merger collapse, saying in the statement that it is “highly confident in the strength of LSEG’s business, strategy and prospects on a standalone basis” and expects to report “strong progress across all business areas” within its preliminary year end results on March 3.

Should LSEG officially withdraw its interest in the merger, the path may be open for non-European rivals to make an approach for either group; in March last year, a statement from ICE announced the possibility of a counter bid for LSEG, although no formal offer was made.

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