Euronext NV's exclusive talks with London Stock Exchange Group PLC to acquire Borsa Italiana SpA could be "strategically highly significant" if the deal closes, according to analysts at investment bank Jefferies.
LSE Group is selling Borsa Italiana in an effort to satisfy regulators from the EC who are in the process of an extended Phase II review of its proposed $27 billion takeover of financial data firm Refinitiv US Holdings Inc. A sale would be dependent on the outcome of the review.
"Borsa Italiana provides [Euronext] with much-needed scale and strategically important product capabilities, including clearing and electronic fixed-income trading," said Jefferies analysts in a note to investors.
Euronext has teamed up with Italian development bank Cassa depositi e prestiti SpA and bank Intesa Sanpaolo SpA for its bid, which would see CDP take an 8% stake in Euronext in return.
The deal would be funded through a mix of existing cash, new debt and new equity with a reserved capital increase to Cassa depositi e prestiti and Intesa Sanpaolo, and a rights issue to Euronext shareholders, according to Jefferies. It said a tie-up would give Euronext the ability to extract more value from its clearing flow, either through vertical integration or through linking up with existing providers, while it would also be in a position to increase the scale the business internationally.
"Borsa's custody business (Monte Titoli) fits neatly with [Euronext's] strategy to create a federal model of European central securities depositories and complements recent acquisitions of Oslo Bors and VP [Securities]. Over the longer term, we maintain our view that the theoretical acquisition of a majority stake in Euroclear completes [Euronext's] central securities depositories' roadmap," said Jefferies.
Commitment to Italy
Euronext has promised to put two Italians on its supervisory board including one as the chairman of the combined group while keeping key parts of Borsa Italiana in Italy if its exclusive talks with LSE are successful.
Italy's finance minister, Roberto Gualtieri, has said the government is prepared to use its powers to block a sale of Borsa Italiana to buyers it considers unsuitable.
Euronext said the Italian CEO of Borsa Italiana would join the managing board of Euronext, while the CEO of MTS would join the extended managing board.
"Key businesses and central functions of the new group would be based in Milan and Rome," said the company.
Bond trading
Euronext, which runs six stock exchanges in Europe,
LSE said it received offers for Borsa Italiana as a whole and for bond trading platform MTS SpA, which is 63%-owned by LSE through Borsa Italiana. Borsa Italiana has an estimated value of between €3.5 billion and €4 billion. MTS was originally created by the Italian Treasury and the Bank of Italy to allow banks to bid for bonds.
Refinitiv, meanwhile, holds a 54% stake in Tradeweb. Both MTS and Tradeweb are significant operators in the European sovereign debt market.
"The EC back in June was very clear that government bonds was one of the 'areas of harm' they were concerned about in the merger when they went to Phase II. That was one of the things that were listed," said a source close to the deal who declined to be named while talks continued.
LSE Group CEO David Schwimmer said in July that there may be more value in selling the whole Borsa Italiana group rather than selling the stock exchange and the bond trading platform separately.
"As was clear from the EC's Phase II announcement on June 22 they have a focus on European government bond trading and there is clearly an overlap between MTS and [Refinitiv's] Tradeweb," Schwimmer said at the time. "We are in exploratory discussions around MTS and we did think it was worth exploring whether there are potential benefits in keeping the businesses [MTS and Borsa Italiana] together."