The London Stock Exchange Group plc (LON:LSE) has revealed its €29bn merger with Deutsche Boerse has been thrown into doubt after saying it was unlikely to meet antitrust conditions set by the European Commission.
The commission had requested the LSE divest its 60% stake in Italian fixed income trading platform, MTS, but the group said it would struggle to meet the requirement.
The LSE called the demand “disproportionate” and said the sale could harm its business.
“Although MTS is not on its own a major contributor to LSE Group revenues, LSE's Italian businesses represent a significant proportion of LSE Group revenues and profitability,” the stock exchange said in a statement today.
“Any change of control of MTS would require, in particular, the approval of the Italian authorities and would trigger parallel regulatory approval processes in other jurisdictions including the UK, Belgium, France and the USA.”
Following discussions with Italian authorities, the LSE said it believes the disposal of MTS is “highly unlikely” as the move would jeopardise its relationships with regulators and hurt ongoing business in Italy.
The commission had asked the parties to formally submit a new proposal for the sale of MTS by 12pm today but LSE has refused.
“Taking all relevant factors into account, and acting in the best interests of shareholders, the LSE board today concluded that it could not commit to the divestment of MTS," LSE said.
“LSE will therefore not be submitting a remedy proposal with respect to MTS. Based on the commission's current position, LSE believes that the commission is unlikely to provide clearance for the merger.”
LSE said it would continue to seek approval of the merger, though a deal will only be possible if the commission changes its stance on its demands.
Deutsche Boerse also released a statement on the MTS decision, saying a final decision from Brussels was expected by the end of March.
Deutsche Boerse has said the proposed deal would create a financial bridge between contintental Europe and the UK. However, the Brexit vote has instead created a barrier with German politicians demanding Frankfurt be headquarters of the group rather than London.
LSE executives were said to be concerned about the question of where the headquarters should be if the commission approved the deal, sources told Reuters. A source close to stock exchange group, however, assured the news agency the sale of MTS was the problem.
The proposed deal has been criticised in France, Portugal, the Netherlands and Belgium over concerns it would dominate the market. Four attempts to combine the London and Franfurt bourses have been made in the past decade, including two public and two informal.
In an effort to relieve EU competition worries, the LSE offloaded clearing house LCH to European rival Euronext last month.
Numis said it thinks the merger of LSE and Deutsche Boerse is unlikely to happen despite taking steps to try to change the commission's mind.
"Although we like the LSE on a standalone basis, we believe the shares have had a very strong run recently and are likely to come under pressure as the market looks to remove the bid premium currently being ascribed to LSE (22x 2017E earnings)," the broker said, reiterating a 'hold' rating.
Shares in LSE dropped 2.46% in London, while Deutsche Boerse fell 2.91% to €79.14 in Frankfurt in late morning trade.
-- Adds reports on worries about LSE headquarters, background details, broker comment, share price --