EU doubts over huge mooted merger
LONDON Stock Exchange Group has agreed to sell its French clearing business to Euronext for million (R7.3billion), as it seeks regulatory approval for its proposed merger with Deutsche Börse.
The European Commission has expressed antitrust concerns about the $28billion (R386-billion) merger and its impact on the clearing of derivatives contracts in particular.
The commission, in a document on the issue, has not made clear if the sale of the French clearing business, LCH Clearnet SA, would be enough to dispel its concerns, two sources said.
One person directly involved in the merger process said he did not believe the sale alone would address the commission’s concerns.
“I have doubts that this is enough,” he said. He suggested that LSE might also opt to sell Borsa Italiana, operator of the Milan stock exchange, to help address antitrust concerns, although a second source familiar with the process said that a sale of Borsa Italiana was not being discussed at the moment.
An LSE spokeswoman said the company could not comment beyond its statement on the sale yesterday. Deutsche Börse representatives declined to comment.
LSE Group and LCH Group Limited said in a joint statement they had agreed on the terms of Euronext’s all-cash offer after announcing last month that they were in exclusive talks with Euronext on a sale.
LSE and Deutsche Börse plan to formally submit the Clearnet SA sale as a remedy to the European Commission’s concerns in the next few days.
A major hurdle to LSE’s merger with Deutsche Börse is how antitrust regulators define the derivatives market.
Deutsche Börse is hoping that the European Commission will treat overthe(OTC) derivatives contracts and on-exchange traded derivatives as two separate markets, sticking to a market definition the Commission confirmed back in 2012.
Deutsche Börse’s Eurex is mainly active in exchange-traded derivatives, while the LSE’s LCH. Clearnet is active in the OTC business.
But Deutsche Börse has acknowledged the European Commission may change its mind, prompting the merger partners to make concessions such as selling LCH Clearnet SA to avoid the LSE-Deutsche Börse combination being regarded as a dominant player.
“It seems the market definition is changing,” Deutsche Börse chief financial officer Gregor Pottmeyer said about the European Commission’s antitrust deliberations in November.
For pan-European exchange operator Euronext, buying Clearnet will give it control of a platform for which it provides much of the revenue and will make it less reliant on a competitor’s clearing services.
Clearing is becoming a much more lucrative business as global reforms introduced after the 2007-09 financial crisis mean banks must clear the bulk of their derivatives trades to make them safer and more transparent.
“If the DB-LSE-merger is completed, then Euronext will be strengthened at the core of the eurozone capital market with this transaction,” Euronext CEO Stephane Boujnah said, adding Euronext was also considering other takeovers.
“The reason why we are confident we can capture those opportunities is because we have significant firing power in our balance sheet, in particular because of our extremely low level of debt.”
Euronext said it expected the deal to add to its earnings in double digits from the first full year, before costs pegged at million. It forecast cost savings of million before taxes. The Commission is due to decide on the merger on March 13, after extending its review deadline for the second time.
It stated its objections to the merger last month, but outlined fewer concerns than in its first letter sent to both exchange operators in September. — Reuters