By Lucy Chen, Jessica Tang (University of Melbourne) and Demi Akinjide, Saihejpal Ailwadhi, Zac Greenberg, Will Sergent, Ben Fobel (University of Bristol)
Overview of the deal
Acquirer: Euronext NV
Target: Borsa Italiana Group (London Stock Exchange Group Holdings Italia)
Seller: London Stock Exchange Group
Total Transaction Size: €4.325 Billion
Announcement Date: October 9, 2020
Expected Close Date: H1 2021
Acquirer Advisors: JP Morgan, Mediobanca
Seller advisors: Goldman Sachs, Morgan Stanley, Barclays, Robey Warshaw
London Stock Exchange Group has agreed to sell Borsa Italiana to a consortium of buyers led by pan-European exchange operator Euronext, in an all-cash transaction. Euronext has partnered with state-owned Italian lender Cassa Depositi e Prestiti Equity and Italy’s biggest bank Intesa Sanpaolo in its bid for Italy’s only stock exchange, beating rival bids from Germany’s Deutsche Börse and Switzerland’s SIX Group.
Under the agreement, LSE will sell its entire shareholding in the owner of Borsa Italiana for a cash consideration of €4.325 billion, plus an additional amount reflecting cash generation until completion. The deal values Borsa Italiana at an enterprise valuation multiple of 16.7x 2019 adjusted EBITDA before synergies, compared to the 15.5x average for recent market infrastructure M&A. Euronext will finance the deal through €1.8 billion of new debt and a €2.4 billion capital raise, including a rights issue for existing shareholders and new equity from CDP and Intesa Sanpaolo.
The deal will create a leading player in continental European capital markets, transforming Euronext into the largest venue for listings and share trading in the EU. It is expected to be immediately accretive to Euronext’s adjusted earnings per share before synergies and generate a total of €60 million pre-tax run-rate synergies by year 3.
The sale of Borsa Italiana is part of LSE’s efforts to overcome antitrust concerns and gain regulatory approval from the European Commission for its $27 billion acquisition of data-provider Refinitiv, announced in August 2019. The deal, therefore, remains conditional upon, among other things, the divestment being a condition of any clearance decision for the Refinitiv transaction.
“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.” - Euronext CEO Stéphane Boujnah
Company Details: Acquirer – Euronext
Euronext NV is Europe’s largest stock exchange and the sixth-largest in the world, encompassing 1,463 listed companies. After a variety of takeovers, such as the acquisition of the Portuguese stock exchange, Euronext has expanded its portfolio to include equities, bonds, and exchange-traded funds. It currently operates regulated exchanges in Belgium, France, Ireland, The Netherlands, Norway, and Portugal.
Founded in 2000, headquartered in Amsterdam, Netherlands
CEO: Stéphane Boujnah
Number of employees: 1069
Market Cap: €6.767 billion (as of 20/10/2020)
EV: €7.48 billion
LTM Revenue: €815.03 million
Company Details: Target - Borsa Italiana Group
Borsa Italiana Group is the integrated Italian market infrastructure that consists of Borsa Italiana, bond trading marketplace MTS and other business lines. Borsa Italiana, Italy’s only stock exchange, manages the domestic market, supervises transactions, and regulates the listing of Italian companies.
Founded in 1808, headquartered in Milan, Italy
CEO: Rafaelle Jerusalmi
Number of employees: 4,587
Projections and Assumptions
Firstly, from the perspective of the vendor, the sale of Borsa Italiana could pave the way for regulatory approval of the Refinitiv takeover. The deal is likely to “contribute significantly to addressing the EU’s competition concerns” and could sway the outcome of the European Commission's review, which is due in mid-December 2020.
Secondly, from the perspective of the acquirer, Euronext will be able to strengthen its competitive positioning in Europe and broaden its geographical footprint. The acquisition will significantly diversify Euronext’s revenue mix and result in Italy becoming the largest contributor to Euronext revenue, at roughly 35% of the combined group. This geographic expansion is viewed as favourable since Italy is a G7 country and the third-largest economy in Europe. The transaction will give Euronext a quarter of all European equities trading and lead to the combined group operating exchanges with a collective market value of €4.4 trillion listed.
In particular, the transaction offers a high degree of autonomy for Borsa. Under the agreement, regulatory oversight of Borsa Italiana will remain in Italy and an Italian will chair the group. Borsa will maintain its current functions, structure, and relationships within the Italian ecosystem and preserve its Italian identity and strengths. Additionally, Borsa Italiana’s knowledge, expertise, and understanding of the specific features of the Italian market will be a fundamental element of enrichment for Euronext.
Finally, the transaction is expected to be immediately EPS accretive before synergies, based on a price per Ordinary Share of €102.50 as of 8 October 2020. It will also double the number of bank assets Euronext holds from €2.2 trillion to €5.6 trillion.
Euronext’s acquisition of Borsa Italiana is expected to facilitate the realisation of €60 million per annum of pre-tax run-rate synergies by year 3. The combined group will benefit from €45 million of cost synergies resulting from leveraging the combined group’s capabilities, migrating Borsa Italiana’s cash equity and derivatives markets to Optiq® and the cooperation of their CSD businesses. The remaining €15 million of revenue synergies are expected to be gained due to the expansion of Euronext’s equity market and derivatives exchange into Italy, as well as the growth of their single liquidity pool. These synergies, however, will only be available to Euronext after a restructuring cost of €100 million has been incurred.
Further upsides are exemplified by the strategic importance of Borsa Italiana in giving Euronext a clearinghouse for the first time as well as a securities depository, stock exchange, and bond platform. Borsa’s valuable bond trading platform MTS (the largest Italian government bond trading platform) will also provide Euronext with its first foray into fixed-income trading.
Risks and Uncertainties
The tricky interplay of politics in stock exchange deals has led many to fail. The attempted merger between the then NYSE Euronext and Deutsche Boerse in 2012 exemplifies this. The sale of Borsa Italiana and MTS to the London Stock Exchange in 2007 proved politically sensitive in Italy where the government regards them as key national assets. Euronext addressed this matter in their bid and agreed to the regulatory oversight of Borsa Italiana remaining in Italy and an Italian chairing the group. With this condition as part of the deal, the Italian government openly favoured Euronext’s bid despite submitting the lowest offer amongst its rivals Deutsche Börse and Switzerland’s SIX. Rome even threatened to use special ‘golden powers’ to block unwanted bids, especially from outside the Eurozone. Board seats coupled with the promise to keep key operations in Italy and Cassa Depositi e Prestiti’s 8% stake may all pose a real threat to Euronext’s autonomy regarding Borsa Italiana over the coming years. Euronext will have to be wary of this involvement from Italy throughout the course of their relationship to avoid a future power struggle.
LSE’s sale of Borsa Italiana is part of its wider strategy of expansion aimed at acquiring Refinitiv. With EU regulatory bodies expected to release antitrust objections to this acquisition due to the large combined company market share, LSE has attempted to allay these concerns by selling the Milan Stock Exchange. This, however, is not certain to satisfy regulators which introduces the possibility that this deal will collapse as it is contingent on the outcome of the European Commission’s review of LSE’s bid to acquire Refinitiv. This dependence on the competition watchdog’s review presents a high-risk factor to the deal. However, with the review expected to be released in mid-December, both parties involved will not have to wait long to find out if the deal is able to advance to further stages.
“We look forward to embarking on the next phase of our history, working in partnership with Euronext, CDP Equity and Intesa Sanpaolo to further develop our business and to contribute to the development of European Capital markets” - Borsa Italiana CEO Raffaele Jerusalmi