The European Commission (EC) on March 29 formally blocked the proposed merger between London Stock Exchange Group plc (LSE.LN) and Deutsche Boerse AG-Tender (DB11.GR), but this was expected.
Keefe, Bruyette & Woods (KBW) analyst Kyle Voigt said, "The key competitive concern for the Commission was around fixed income clearing, and it appears the divestiture of LSE's MTS business could have addressed this."
The two areas of concern identified by the Commission's competition team were trading and clearing of single-stock equity derivatives and clearing of fixed income instruments (bonds and repos). As the Commissions said that the divestiture of Clearnet SA addressed its concerns for single-stock equity derivatives but did not fully address its concerns for fixed income clearing. The Commission stated in its release that "the divestment of MTS, a comparatively small asset compared to the parties' combined revenues and market value, would have been a clear-cut remedy to meet these concerns."
For potential future exchange mergers and acquisitions, the KBW says there was not a serious concern from the Commission around the concentration of interest rate derivatives clearing in Europe. Therefore, the Commission likely took the approach (similar to prior exchange mergers) of examining London's over-the-counter (OTC) and listed derivative markets separately. Given that this deal would have likely received EC approval if LSE divested MTS, the KBW thinks exchange M&A involving LSE and another interest party could still be viable.
LSE has previously stated that it would consider paying a dividend to LSE shareholders upon successful deal closure to make its dividend equivalent to that of DB11's for the year. Even though the deal has failed, the company is still planning on returning capital but has instead announced a £200 million buyback program. If exercised in full, this buyback would equate to around 1.8% of LSE's total share count using LSE's current share price.
The EC is expected to publish a more detailed decision at a later date.