Everything seemed to be going so smoothly. Nearly a year after the London Stock Exchange and Deutsche Boerse unveiled their latest attempt to merge, many City folk gave the £21bn deal a respectable chance of success. "Better than 50 per cent," one high-profile Square Mile executive said at a lunch earlier this month.
The European Commission appeared to be on board. Last year it demanded the LSE divest its French clearing arm LCH SA. No problem, replied stock exchange boss Xavier Rolet, and duly lined up a sale of the business to Euronext. Otherwise, with a relatively narrow remit, the Commission was believed to be content and ready to green light the deal in early April.
Political opposition in both Germany and the UK was inevitable, but did not look as vociferous as had been feared. British dissent was limited to a fairly small band of eurosceptics, while in Germany it centred on the state of Hesse. Hessian complaints were growing, for sure, but sources close to the deal doubted whether a single state would really de-rail a deal of this magnitude once it received backing from Brussels.
Extraordinarily, that backing has evaporated overnight. Late on Sunday evening, the LSE published a statement admitting it now expects the Commission to block the merger on the basis that it will not divest its majority stake in an Italian trading platform that services Italian sovereign debt.
After months of analysis and discussion, the Commission made this demand less than two weeks ago, according to the LSE. Its merger team’s astonishment at the sudden new roadblock is evident in the language of the statement. Noting how the Commission began "Phase II proceedings" back on 28 September 2016, the LSE says: "On 16 February 2017, the Commission unexpectedly raised new concerns".
The statement suggests it would be extremely difficult if not impossible for the LSE to sell its majority stake in MTS (the Italian platform). The Italian regulators are not believed to have welcomed the suggestion of a new owner for a systematically-important asset. The LSE claims it offered to meet the EU's regulators half-way, proposing an "improved remedy", but were told it was all or nothing – with "nothing" now the likeliest outcome.
Talks were lengthy and intense throughout last week, City A.M. understands, and spilled into the weekend. But on Sunday the LSE's top team decided it could not budge, and under Financial Conduct Authority rules it was obliged to publish a statement.
The Commission could still U-turn on its decision. It could decide to meet the LSE half-way. But if it does not, there seems little chance of the much-flaunted mega-merger going ahead.
How did things change so quickly? How did the Commission abruptly decide upon this new condition?
The most conservative theory is simply that a problem arose while the EU's antitrust wonks were crunching their data. Enormous amounts of calculations lie behind these decisions, and perhaps it's feasible that a fresh area of concern emerged in relation to the bond market.
Other theories, already circulating around the City, are more colourful. Political opposition, while centred around Hesse, had grown louder, and in the wake of last year's Brexit vote many politicians in Germany – and elsewhere in the Eurozone – were incredulous that a post-merger Deutsche Boerse could end up with its official headquarters in London. On top of this, some people suggest rival exchanges, such as Euronext, were keen to grab a bigger slice of the European trading pie. This could have resulted in political pressure to force the LSE and Deutsche Boerse into hiving off extra divisions – such as MTS.
All political careers end in failure, so they say – and this merger has become an intensely political affair. But if Rolet ends up leaving the stock exchange without his legacy mega-deal in place, we should not be too harsh on the Frenchman. Pushing through such a deal was always going to be an enormous challenge, even before Britain voted to leave the EU. Many City folk will view Rolet’s reign as a strong period during which London’s stock exchange bolstered its global presence.
Whatever the story behind the LSE’s fallout with Brussels, cynics are unsurprised. This was the third time since the turn of the century that a takeover or merger has been mooted between the two companies.
Despite getting a lot further than on the previous two attempts, it doesn’t look like it’ll be third time lucky for Deutsche Boerse and the LSE.