European Commission blocks LSE, Deutsche Boerse merger

The European Commission has blocked the proposed merger between Deutsche Boerse and London Stock Exchange, saying it would have significantly reduced competition.

The decision came as the companies failed to offer up adequate remedies to address all of the Commission's competition concerns.

In particular, the EU pointed to LSE's refusal to divest its Italian bond trading arm, MTS, which it said would have been a clear-cut remedy to meet its concerns.

Commissioner Margrethe Vestager, in charge of competition policy, said: “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.”

In addition, the EC 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.

LSE said it was confident in its prospects as a standalone business, adding that its strategy for growth continues to deliver strong results. The company had announced that as part of the merger it would pay a special dividend to its shareholders, contingent on completion.

It said on Wednesday that although this special dividend is now not required, it will honour the capital return commitment and now plans to initiate an on-market share buyback of £200m, an amount broadly equivalent to the return it would have made had the merger gone ahead.

"LSEG continues to be actively engaged in exploring selective inorganic and ongoing organic investment in order to drive further growth and will continue to consider opportunities for further capital returns in line with its capital allocation framework."

LSE also said that the proposed sale of LCH SA to Euronext will terminate.

Joachim Faber, chairman of the Supervisory Board of Deutsche Boerse, 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.”

CEO Carsten Kengeter added: "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.”

Neil Wilson, senior market analyst at ETX Capital, said Brexit effectively killed this deal off nine months ago so it’s fitting that EU competition commissioner Margrethe Vestager delivered the coup de grace just a couple of hours before the UK triggers Article 50.

"In the end LSE made it easy for the regulators by refusing to sell its stake in MTS, the Italian fixed income trading platform. The response from investors is positive with LSE shares jumping more than 3% on the news before paring gains to trade up 1.5% for the day. Perhaps there is life outside continental marriages after all.”

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said the rejection was no surprise, after the LSE effectively walked away from the deal when it refused to meet the requirement to sell its 60% stake in MTS.

"However, shareholders will welcome the LSE’s decision to go ahead with a return of capital to shareholders that was promised as part of the deal."

At 1015 BST, LSE shares were up 1.4% to 3,065p while Deutsche Boerse was up 1% to €82.65.