Euronext to acquire Borsa Italiana for €4.3bn

The London Stock Exchange Group really wants Refinitiv, so much so that early last month it agreed to sell one of its largest subsidiaries, Borsa Italiana to Euronext. This came soon after the LSEG's announcement in July that it may sell part or all of Borsa Italiana, Italy's only stock exchange, in hopes of securing regulatory approval for its $27bn acquisition of Refinitiv.

"We believe the sale of the Borsa Italiana group will contribute significantly to addressing the EU’s competition concerns." – David Schwimmer, LSEG CEO

Who?

Acquirer: Euronext N.V.

Euronext, the acquirer, is a leading pan-European market infrastructure, connecting local economies to global capital markets. It is the largest stock exchange in Europe, operating regulated exchanges in Belgium, France, Ireland, The Netherlands, Norway and Portugal. With close to 1,500 listed issuers worth €3.8 trillion in market capitalisation, it has an unmatched blue-chip franchise with a strong diverse domestic and international client base. Euronext operates regulated and transparent equity and derivatives markets and is the largest centre for debt and funds listings in the world.

Seller ( Target ): The London Stock Exchange Group's Borsa Italiana

LSEG is a global financial markets infrastructure business. Its diversified global business covers Information Services, Risk and Balance Sheet Management and Capital Formation. Through its platforms, the group offer market participants unparalleled access to European Capital Markets. The Group operates a broad range of international equity, ETF, bond and derivatives markets, including London Stock Exchange; Borsa Italiana and MTS (a European fixed income market). Borsa Italiana, the subject of the acquisition, organises and manages the domestic Italian market, regulating procedures for admission and listing of companies, and supervising disclosures for listed companies.

The Deal

Value: €4.325bn (all-cash consideration)

Announced: 9 October 2020 (expected to be completed by H1 2021)

Financial Advisors to Euronext and CDP: J.P. Morgan, Mediobanca, and Lazard

Financial Advisors to LSEG: Goldman Sachs, Morgan Stanley, Barclays, Robey Warshaw

Despite higher bid offers from Germany’s Deutsche Börse and Switzerland’s SIX Group to win the Borsa Italiana deal, the LSEG chose to engage with Euronext. “Over the last 15 years, Euronext has become the consolidator of choice for the traditional local cash equity exchanges. They developed political connections, a unique skill set and specific processes.”

– Mark Yockey, portfolio manager at Artisan Partners.

Expanding this, there is significant political sensitivity in Italy, where the government regards Borsa Italiana as an important national asset and key domestic financial infrastructure. As a result, Euronext submitted a joint bid with Italian Bank Intesa Sanpaolo and state-owned investor Cassa Depositi e Prestiti (CDP). As reported by the Financial Times, it is said that Euronext plan to maintain governance of Borsa Italiana in Italy and make an Italian its chairman, as these were supposedly two of the preconditions that Italy demanded to move forward with the offer. Overall, this is likely another key reason for the LSEG’s decision to enter an agreement with Euronext ahead of the other bidders, as it improves the feasibility that the deal will be completed successfully and within a sufficient timeframe.

Why?

Strategic Rationale:

LSEG:

For the London Stock Exchange Group, the rationale behind the divestment is seemingly rather simple, to persuade EU competition authorities to sanction its purchase of Refinitiv. This is because the Refinitiv deal would turn the conglomerate into one of the world’s largest capital markets infrastructure operators with substantial control of major exchanges, indices and data. As a consequence, this raises competition concerns that the group could reduce fixed income trading competition levels. Subsequently, the LSE said in early October that the divestment of Borsa Italiana would be a probable condition for clearance by the EU’s competition watchdog. This is partly because Borsa Italiana is the majority owner of a significant bond trading venue, MTS.

Euronext:

There is also a clear rationale for Euronext to swoop in on the deal. Acquiring Borsa Italiana naturally aligns with Euronext’s strategy and would cement its position to create a leading pan-European market infrastructure. It would add to the already long list of stock exchanges that the group own. These include the main stock exchanges of Brussels, Amsterdam, Paris Dublin, Lisbon and Oslo. Thus, this transformational combination positions the newly formed group to deliver the ambition of further building “the backbone of the Capital Markets Union in Europe” said its chief Executive Stéphane Boujnah, while at the same time supporting local economies and attaining a more diversified global footprint. As seen below, Italy will represent 34% of the combined group revenue, further expanding Euronext’s footprint:

Source: Euronext

Synergies

In the short-term, the deal is expected to be immediately accretive before synergies on the adjusted EPS, and double-digit accretion is expected post run-rate synergies in year 3. The acquisition also presents substantial long-term upside for Euronext. Firstly, it is expected that the combination will facilitate the realisation of €60m in annual pre-tax run-rate synergies in year 3. However, the restructuring costs to deliver these synergies are expected to amount to €100m. Breaking this down:

▪ €45m run-rate cost synergies, notably through leveraging combined group capabilities and the roll-out of Euronext’s Optiq® technology in Italy. There is also potential to achieve additional technology synergies through cooperation of their CSD businesses.

–> Some context: Optiq® is Euronext’s state-of-the-art proprietary trading platform and a central securities depository (CSD) is an institution that holds financial instruments, including equities, bonds, money market instruments and mutual funds.

▪ €15m run-rate revenue synergies from cross-selling and growth opportunities. However, the restructuring costs to deliver these synergies are expected to amount to 100 million EUR. Finally, the transaction is expected to be immediately accretive before synergies on the adjusted EPS, and double-digit accretion is expected post run-rate synergies in year 3.

Uncertainties

One key contingent that will ultimately determine whether the deal goes ahead is the EU competition authorities’ decision. They now have until mid-January to make a ruling. This deadline initially stood at mid-December but was pushed back by a month to allow the competition authorities to examine LSEG’s new commitments to getting the deal secured. However, it is not certain that LSEG’s sale of Borsa Italiana will satisfy the competition watchdog, which could result in a synchronised breakdown of both the Refinitiv and Euronext deals. This is due to the fact that if LSEG’s acquisition of Refinitiv does not receive regulatory approval, then it no longer has a strong incentive to sell Borsa Italiana. Therefore, the short-term wait for a decision presents a significant risk to the deal.

Additionally, the difficult to navigate political challenges that stock exchange transactions face often pose a threat to the success and realisation of attempted deals. However, Euronext has done well to address this and gain Italy’s buy-in through its partnership and joint bid with state-owned Italian lender CDP (Cassa Depositi e Prestiti) and Italy’s largest bank Intesa Sanpaolo.

Overall, as stated by Stéphane Boujnah (Euronext chief executive) “the combination of Euronext and the Borsa Italiana Group, with the strategic support of long-term investors such as CDP, delivers the ambition of building the leading pan-European market infrastructure, connecting local economies to global capital markets.” This combination has the projected potential to simultaneously accelerate Euronext’s vision whilst also providing substantial long-term returns through both revenue and cost synergies.