London Stock Exchange (LSE) merger with Deutsche Boerse blocked by European Commission and Margrethe Vestager

 
William Turvill
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The London Stock Exchange and Deutsche Boerse agreed a £21bn merger last March (Source: Getty)
  • European Commission confirms blocking of “de facto monopoly” deal
  • LSE sale of LCH SA to Euronext was not enough, commission also demanded MTS sale
  • LSE confirms sale of LCH SA will collapse along with the Deutsche Boerse merger
  • Deutsche Boerse says deal breakdown is “setback for Europe”
  • LSE announces £200m share buyback. Share price jumps three per cent

The European Commission has blocked the London Stock Exchange-Deutsche Boerse deal, saying it would have created a “de facto monopoly”.

The veto has been expected since the London Stock Exchange indicated it was not willing to divest its Italian trading business MTS at the end of last month.

The commission noted that the merged company would have owned stock exchanges in the UK, Germany, Italy, as well as several of Europe’s largest clearing houses.

Read more: MTS and the London Stock Exchange deal: How a straw broke the camel's back

Specifically, the commission was concerned about the merged company dominating two areas: firstly, the clearing of fixed income instruments; and secondly, the trading and clearing of single stock equity derivatives.

The first issue would have been resolved by the London Stock Exchange’s sale of LCH SA to Euronext, which was agreed in January.

The second concern, which arose later in the process, would have been solved by the London Stock Exchange also agreeing to sell Italian trading platform MTS.

The London Stock Exchange was unwilling to do so, and the European Commission would accept nothing less.

Deutsche Boerse said the deal breakdown was a “setback for Europe”.

Competition commissioner Margrethe Vestager said today:

The commission cannot allow the creation of monopolies, and this is what would have happened in this case. And this is why we have prohibited this merger.

Specific concerns

The EU body was concerned that the merger would have created a monopoly in the clearing of fixed income instruments, i.e. bonds and repurchase agreements. Specifically, it would have brought together Deutsche Boerse’s Eurex, LCH.Clearnet, including LCH SA, and Rome-based Cassa di Compensazione e Garanzia.

The commission also said the merger would have “removed horizontal competition for the trading and clearing of single stock equity derivatives”, based on stocks of Belgian, Dutch and French companies. It said the “market power could potentially also be used to squeeze out Euronext”.

Vestager confirmed that it was the commission’s view that the London Stock Exchange selling its French clearing business, LCH SA, to Euronext was a sufficient remedy for the first issue.

However, the commission felt that it was not enough because the London Stock Exchange could subsequently divert MTS trading away from LCH SA. The MTS concerns arose after market testing showed that LCH SA’s fixed income clearing business is “vitally dependent” on trading feeds from MTS.

The London Stock Exchange was not prepared to sell MTS but, as City A.M. revealed earlier this month, did offer a commitment under which MTS trading would continue to flow through LCH SA.

A commission statement today said that an MTS sale would have offered a “clear-cut remedy to meet these concerns”. It was not satisfied with the behavioural commitment.

Read more: Stock exchanges on stand-by as they await merger news from Brussels

Vestager added:

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 Boerse 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.

It emerged that the London Stock Exchange and Deutsche Boerse were in talks to merge in February last year. It marked the third occasion they had publicly attempted to do so. They agreed a deal in mid-March 2016.

Stock exchange reactions: "A setback for Europe"

London Stock Exchange Group shares jumped two per cent after the announcement, while Deutsche Boerse went up one per cent.

The London Stock Exchange confirmed that, with the deal having collapsed, it would no longer be selling LCH SA to Euronext.

The stock exchange said it did not agree with the commission that the sale of LCH SA would not have been a “viable stand-alone competitor without the concurrent sale of MTS”. The company revealed it had offered a “clear cut structural remedy” which would guarantee “access to MTS trade feeds for three years”.

The London Stock Exchange said:

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.

The company offered a sweetener to shareholders today. It had agreed to pay a special dividend on completion of the merger. As it will no longer be doing so, the group said it would instead initiate a £200m share buyback, “an amount broadly equivalent to the return it would have made had the merger with Deutsche Boerse proceeded as planned”.

Deutsche Boerse chairman Joachim Faber described the European Commission block as a “setback for Europe”.

He said:

The prohibition is a setback for Europe, the Capital Markets Union and the bridge between continental Europe and Great Britain. A rare opportunity to create a global market infrastructure provider based in Europe and to strengthen the global competitiveness of Europe’s financial markets has been missed.

Chief executive Carsten Kengeter said:

Deutsche Boerse is well-positioned on a stand-alone basis to compete at a global level with other market infrastructure players. We will continue to pursue our growth strategy, to strengthen our innovation capabilities and to even better serve market and customer needs. Through this strategic approach we want to create added value for our clients and shareholders and contribute to the positive development of Frankfurt as financial centre.

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