EC blocks LSE's £21-bn merger with Deutsche Borse
29 March 2017
The European Commission has blocked the proposed £21-bn merger of the London Stock Exchange and its German rival Deutsche Börse, saying the merger of the two major stock exchanges would create a 'de facto monopoly'.
It is the third time that a merger between LSE and Deutsche Boerse rival has failed to materialise.
Margrethe Vestager, the EU competition regulator, said the deal between the London and Frankfurt exchanges would create a ''de facto monopoly in the crucial area of fixed income instruments''.
The EC move to block the merger of the two European bourses comes on the day British Prime Minidster Theresa May signed the official letter seeking to trigger Brexit.
The European Commission said the two exchanges had failed to address its competition concerns after the LSE rejected the commission's request last month to offload its 60-per cent stake in the Italian trading platform MTS. (See: LSE ''highly unlikely'' to meet EC conditions for Deutsche Börse) Margrethe Vestager, the EU's competition commissioner, said, "The European economy depends on well-functioning financial markets.
"That is not just important for banks and other financial institutions. The whole economy benefits when businesses can raise money on competitive financial markets.
"The merger between Deutsche Borse and the London Stock Exchange would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments.
"As the parties failed to offer the remedies required to address our competition concerns, the Commission has decided to prohibit the merger."
LSE Group said it regretted the Commission's decision to prohibit the proposed merger and looks forward to reviewing the detailed commission decision in due course.
In February, the two had agreed to sell French clearing house LCH Clearnet to their European rival Euronext in a bid to get EC approval for their planned merger.
However, the EC had concerns about the viability of LCH Clearnet remedy, and wanted LSE to also divest its 60-per cent stake in Italian exchange MTS.
LSE Group disagreed with the EC's assessment about the viability of LCH Clearnet, which accounts for a significant proportion of all European repo clearing and European cash bond clearing, and is not reliant on revenue generated from MTS trade feeds.
Nevertheless, in order to address the commission's viability concerns, LSE Group offered a clear cut structural remedy which included guaranteed access to MTS trade feeds for three years. This, LSE Group calculated MTS would have accounted for less than 10 per cent of LCH SA's overall gross income.
''LSEG regrets the Commission's decision to reject this improved remedy, which was clear cut, viable and addressed the Commission's competition concerns.
LSEG believes the proposed merger with Deutsche Börse in combination with the LCH SA remedy would have preserved credible and robust competition in all markets.
''This was an opportunity to create a world leading market infrastructure group anchored in Europe, which would have supported Europe's 23 million SMEs and the development of a deeper Capital Markets Union. LSEG looks forward to reviewing the detailed Commission decision to be published under Article 8(3) Regulation (EC) 139/2004 in due course,'' it said.
LSE Group said it is confident in its prospects as a standalone business and its strategy for growth continues to deliver strong results, as seen in the Group's recent Preliminary Results for 2016.
As part of the merger, LSEG had previously announced that it would pay a special dividend to LSEG shareholders, contingent on completion of the merger with Deutsche Börse.
Although this special dividend is now not required, LSEG intends to honour the capital return commitment, consistent with its capital allocation framework and reflecting its leverage at the low end of its targeted range. Accordingly, LSEG now plans to initiate an on-market share buyback of £200 million, an amount broadly equivalent to the return it would have made had the merger with Deutsche Börse proceeded as planned.
LSEG said it continues to be actively engaged in exploring selective inorganic and ongoing organic investment in order to drive further growth and will continue to consider opportunities for further capital returns in line with its capital allocation framework.
The deal had been in the making for 13 months and LSE and Deutsche Börse had pledged to press ahead with the deal even after Britain voted to leave the EU last June. It was the third attempt at a merger between the two companies after failures in 2000 and 2005.
The tie-up has faced multiple hurdles since it was first mooted in February last year, with Britain's Brexit vote flagged by analysts as a potential barrier that could scupper the deal.
The LSE had agreed to offload its French clearing business LCH to Euronext for 510 million euro (£434 million) to help smooth the passage of the merger.
Meanwhile, things got muddled when it was revealed that Deutsche Borse boss Carsten Kengeter was under investigation by German authorities over alleged insider dealing.