This merger was supposed to create a bridge between Frankfurt, the Eurozone’s financial capital, and post-Brexit London, Europe’s and -sometime – world’s financial centre. However, the mega-merger designed to create a European champion for investors and listed companies — the very embodiment of the Commission’s capital markets union — is in deep trouble. And Brexit is its name.
Uncertainty about the UK’s future in Europe is what might just end the Deutsche Börse-LSE merger.
A few weeks ago, the London Stock Exchange announced its long-planned tie-up with Frankfurt-based Deutsche Börse was in troubled waters. The given reason for the situation was the claim that the LSE held ownership of an obscure Italian bond trading platform. Whilst the €29 billion deal was always far from a sure thing, and technicalities, for all their trouble are still important waters to navigate, the reality is that Brexit has caused jitters.
The merger between the two leading European exchange groups was left hanging by a thread after the LSE announced it was not able to meet a key condition for approval by European Commission competition authorities.
“Based on the Commission’s current position, [London Stock Exchange Group] believes that the Commission is unlikely to provide clearance for the merger,” LSE said.
LSE said the issue is that in mid-February, the Commission ‘unexpectedly’ asked the company to sell its majority stake in MTS, an Italian platform for trading bonds. The Commission’s competition directorate wanted LSE to commit to the sale by Monday, 27th February. The day before this deadline, the LSE said it could not do that.
The exchange’s statement does not explain why, but it implies that the Italian authorities didn’t want it to sell:
“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.”
The LSE statement also implied that the deal’s chances are now slim. In the last paragraph, it says the company’s board “is highly confident in the strength of the [LSE’s] business, strategy and prospects on a standalone basis, under its strong management team led by Chief Executive Xavier Rolet,” who was going to leave after the merger but would presumably stay if there is no deal.
The Commission has until the 3rd April to make a decision on the issue – a date notably set after the proposed deadline for the British Prime Minister to invoke Art 50, and commence the process of formally withdrawing the UK from the EU.
The fact of the matter is, this was always going to be a very political deal, and it became an even more political deal after Brexit.
After months of preparation, a merger of this scale is not going to wither away on a technicality. What could yet end it is uncertainty over the UK’s departure from the EU.
Given that Theresa May has yet to even invoke Art 50, it remains too early to predict what type of arrangement the UK will acquire from the EU for the City of London. The regulatory uncertainty that financial companies face in the interim makes a deal like the LSE-DB merger risky if not outright negligent. Add to that the suddenly toxic politics in London, and on the Continent, around anything that touches on future relations between the two.
Of course, something might happen which would keep the merger alive. Some type of three-way deal might be struck between the LSE, the Italian authorities, and the Commission to allow the LSE to sell its big stake in the Italian bond-trading platform MTS to a buyer approved by the Italians.
But would require the Commission to extend the deadline for a deal to be agreed. And that’s not looking too likely.
Now, should the merger ultimately fail, the LSE could become the subject of another bid. This would most likely be in the form of a US rival, perhaps ICE or Nasdaq. Alternatively, an Asian may step into the frame, such as the Hong Kong Stock Exchange. These non-European suitors could be emboldened by the lower pound and the likely fall in the value of the LSE’s shares if the DB deal fails.
Regardless of what unfolds, Brexit will be on everyone’s lips.
Brexit is already having a corrosive effect on the UK’s business ties with the Continent. There may be few signs the UK economy had taken a hit in the immediate aftermath of the EU referendum, but the possible decline of the LSE deal is just the sort of longer-term damage many economists warned about before the vote.
One of the key issues on the list for EU and British Brexit negotiators — in addition to citizen rights, and the ongoing debate over a so-called ‘divorce bill’ — will be how to uphold all the deals and investments negotiated on the assumption that the UK belongs to the EU. As the apparent LSE-DB breakup seemingly demonstrates, many investors just cannot afford to wait for the politicians to sort it all out.