The sudden announcement that the London Stock Exchange may be having doubts about its proposed €29 billion merger with Deutsche Börse has both market players and Brussels watchers asking what might be behind the change of heart.
With the U.K. about to officially trigger the divorce proceedings from the EU, the fact that a mega-deal that could remake Europe’s financial landscape may be stillborn will have far-reaching implications for the ambitions of London and Frankfurt to reign as Europe’s leading capital market, post-Brexit.
The merger between the two leading European exchange groups hangs by a thread after the LSE said late Sunday it won’t be 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.
The LSE said Sunday night it couldn’t do that.
The exchange’s statement doesn’t explain why but 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 statement said.
A person close to the talks said Monday: “The divestment made no sense from the [LSE] board’s perspective.”
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.
Deutsche Börse did not respond to a request for comment. However, DB was surprised by Sunday’s announcement, sources familiar with the deal said, as they thought that the LSE would go along with the Commission’s requirements — even if reluctantly.
On the German side, a top issue had been where to host the the joint headquarters of the merged entity. The state of Hesse, where DB is headquartered, is insisting it be based in Germany. “This was always going to be a very political deal, and it became an even more political deal after Brexit,” a source close to the deal said.
Hard-line Brexiteers in the U.K. parliament were said to be less than thrilled at the prospect of the Germans becoming the new landlords of the London Stock Exchange.
The Commission seems to have been equally caught off-guard. “This came as a surprise. There was some frenziness last week … I wasn’t aware the issue would be fatal,” said a Commission source.
“This is a signal the parties don’t want to merge,” said one observer who has been closely following the deal. “The [Commission] has been very soft.”
The Commission has until April 3 to make a decision.
Nicholas Hirst, Silvia Sciorilli Borrelli, and Johanna Treeck contributed reporting.
