London Stock Exchange Sells Italian Exchange for $5.1 Billion--Update

By Anna Isaac and Ben Dummett 

LONDON -- London Stock Exchange Group PLC agreed Friday to sell Borsa Italiana Group to a group led by pan-European rival Euronext NV, a divestment meant to smooth approval of its separate, much larger, acquisition of financial-data company Refinitiv Holdings Ltd.

The deal, priced at around EUR4.33 billion, equivalent to $5.1 billion, is aimed at alleviating antitrust concerns about the potential bond trading dominance of the proposed $15 billion tie-up between LSE and Refinitiv. Borsa Italiana's MTS SpA is the leading bond exchange in Italy, one of Europe's largest debt markets. Refinitiv owns bond-trading platform Tradeweb.

"This removes a major hurdle towards the deal, and may also generate some political goodwill," said Chris Turner, equity analyst at Berenberg Bank, ahead of Friday's announcement.

Euronext leads a consortium of buyers that includes an investment arm of the Italian government and Italian bank Intesa Sanpaolo SpA. The deal price includes an additional unspecified payment based on cash generated by the Italian exchange through the deal's completion, the companies said. The Italian government had previously signaled that it would favor a deal in which Italy would retain some ownership of the exchange.

Shares in Euronext dropped 3.8% following agreement of the deal. LSE's stock rose 0.8%.

The LSE's deal to acquire Refinitiv is under review by the European Commission, the European Union's antitrust regulator. Euronext and LSE said the deal for Borsa Italiana is conditional on the European Commission requiring the LSE to sell the Italian exchange, or a large part of it, to win commission approval for the LSE-Refinitiv transaction. A decision on whether to approve the larger deal is due by Dec. 16.

The LSE is betting that the deal to acquire Refinitiv will help it to create a financial data juggernaut. The largest exchange company in Europe by market value, it has tried to diversify its business away from its bread-and-butter stock and bond trading, toward higher margin data services.

The potential scale of LSE and Refinitiv's data operations forms part of the concerns flagged by the European Commission's antitrust probe. Brexit is also a factor, with U.K.-based LSE now outside the EU. This raises issues of data movement across a new information border between the U.K. and the bloc post-Brexit. Data sharing is subject of ongoing negotiations between the U.K. and EU over a post-Brexit trade deal.

Bond trading venues have become a sensitive topic for the EU as the European Central Bank prepares to sell hundreds of billions of euros of common debt for the first time in response to the coronavirus pandemic. Europe's financial scene has long been dominated by American and U.K. players, with London as the undisputed financial center of the region. With the U.K. out of the EU post Brexit, EU politicians and executives have pushed to boost indigenous rivals.

European politicians and officials in Brussels favored Euronext's bid over a rival offering from Deutsche Börse and Switzerland-based SIX Group. Part of the rationale was that it would allow EU leaders to realize their goal of creating a more unified capital market to cut the bloc's dependency on bank loans for corporate financing, according to analysts and people familiar with the matter. Switzerland isn't an EU member.

The pandemic had injected urgency into the capital markets union project "because the strength of economic recovery will depend on well-functioning capital markets and access to market financing," said Valdis Dombrovskis, European Commissioner for the Economy and Trade, on Sept. 12.

U.S. exchange operators such as Nasdaq Inc. and Intercontinental Exchange Inc. have been reluctant to bid on European market infrastructure as they realize they are less likely to succeed due to political pressures, analysts said.

Euronext operates markets in Belgium, France, Ireland, the Netherlands, Norway and Portugal. The Italian exchange will now likely be its biggest source of revenue. In 2019, Euronext generated 679.1 million euros, equivalent to $804.7 million, in revenue. LSE doesn't break out revenue for the Italian exchange.

Euronext's deal for Borsa Italiana is the latest in a string of purchases aimed at spreading its footprint across Europe and building scale to cut costs. It helps to diversify Euronext's business by adding bond trading, and strengthening its pan-European cash equity business, said analysts at Deutsche Bank in a note, ahead of the deal's completion.

While there are savings to be made by stripping out costs in the short and medium term, there are also other challenges to Euronext as a result of the deal. Stock trading is competitive and generating less cash than it used to. Some see it as an area effectively in managed decline.

Another factor is that Euronext, which is small by industry standards, has been able to grow by snapping up relatively small exchanges in places such as Norway and Ireland.

"Where do they go after [Borsa] Italiana? When they are much bigger, anything else they buy will bring them into closer contact with bigger, deeper pockets like ICE, Deutsche Börse, and LSE," Mr. Turner the Berenberg analyst said.

Write to Anna Isaac at [e-mail] and Ben Dummett at [e-mail]

(END) Dow Jones Newswires

October 09, 2020 06:50 ET (10:50 GMT)

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