Euronext/Borsa Italiana: Game of Zones
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In chess, an Italian Game strategy starts with the king’s pawn. The London Stock Exchange Group made a key move in its $27bn gambit to buy data provider Refinitiv on Friday. Hoping to secure the approval of European competition authorities, LSE confirmed it would sell Borsa Italiana to exchange group Euronext for €4.3bn, all cash. The deal is equally crucial for Euronext and chief executive Stéphane Boujnah, reflecting the full price offered.
The tricky interplay of politics and business in stock exchange deals has led many to fail. Euronext has done enough to satisfy the Italian state. Borsa Italiana’s ownership will remain within EU jurisdiction once Britain leaves. Italian strategic concerns are assuaged by an equity contribution from state investment fund Cassa Depositi e Prestiti (CDP). Likewise, Italy will become Euronext’s largest source of revenues, giving it the scale it lacks compared with rivals.
Bridge financing will cover Euronext’s initial outlay as this deal depends upon LSE’s purchase of Refinitiv. Other than cash, the bulk of that sum will later be met with €1.8bn in new debt and €2.4bn in new equity. CDP and Intesa Sanpaolo will contribute €700m in a private placement. The remaining equity will come from a rights issue leaving CDP with about 7 per cent of Euronext.
Deutsche Börse’s participation in the auction process helped LSE achieve a full price, near the top end of recent sector deals at almost 17 times trailing ebitda. Strategic rationale justifies a high price, if softened by cost cuts. Euronext estimates annual savings of €45m, or 20 per cent of Borsa Italiana’s cost base last year. It might beat that, thinks Jefferies. Deals among exchanges typically generate savings between 30 and 40 per cent of overheads.
Markets and payments infrastructure can matter as much to national economies as energy and transport. A successful deal would give Euronext and the Italian state an important role in the eurozone markets system. LSE, with Refinitiv, will become a data powerhouse. Checkmate all round.
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