LSE Paves Deal Path With $533 Million Unit Sale to Euronextby
Deal values unit at about 90 million euros below 2003 sale
Divestment is an attempt to assuage European merger watchdogs
London Stock Exchange Group Plc agreed to sell its French clearing unit to Euronext NV for 510 million euros ($533 million) in cash, putting it on course to end a 13-year combination that the company hopes will pacify competition watchdogs.
LCH.Clearnet SA’s sale requires Euronext shareholder and other approvals, according to a statement from Euronext Tuesday. The deal may be completed by the end of the second quarter.
The clearinghouse’s sale is an attempt to smooth the way for Deutsche Boerse AG’s $12 billion takeover of London-based LSE. That deal would create Europe’s dominant operator in everything from indexes to stock markets and clearing, a vantage sought over the years by multiple chief executives.
The purchase “will diversify Euronext revenue streams and give us access to new asset classes,” Chief Executive Officer Stephane Boujnah said in a conference call, referring to fixed income and credit-default swaps markets.
Euronext rose 2.3 percent to 39.86 euros in Paris trading, near an August high.
Clearing -- a back-office function that acts as a firewall against defaulting traders -- is a key rationale for Deutsche Boerse’s acquisition and is also the deal’s most difficult hurdle. The European Union scuttled a similar tie-up in 2012 amid concerns it could shut out rivals to the clearing market.
LSE and Deutsche Boerse are willing to sell LCH’s French clearinghouse because it won’t harm one of the most important aspects of their transaction: putting LSE’s mammoth swaps-clearing business under the same roof as Frankfurt’s derivatives clearinghouse, called Eurex. Doing so may make derivatives trading more efficient, but could also give the companies a worrisome grip over prices.
Euro-derivatives clearing has been targeted by French and German authorities since the U.K. voted in June to leave the EU. LSE’s sale of the French unit will do little to appease the likes of French President Francois Hollande. That particular battle has focused on the $2.7 trillion-a-day interest rate swaps market, which is primarily cleared by LCH’s London-based operations.
LSE became majority owner of LCH in 2013, around the time post-crisis regulations were coalescing to push more derivatives trading through clearinghouses. The remainder of the clearing firm is owned by bank members and other exchanges.
LCH’s French unit clears stocks, fixed-income, listed-derivatives and credit default swaps, and Euronext is among its biggest customers.
The French clearinghouse posted a 36.2 million profit in 2015, compared with about 33 million euros when it combined with LCH 13 years ago. The 2003 deal -- valuing the clearing unit at about 600 million euros -- was seen as a way to help simplify the financial plumbing behind European markets.
Euronext said it expects to cut costs at the clearing unit through synergies that amount to about 13 million euros per year, most of which will be in place by 2020. The company is funding the purchase through a mix of borrowing and available cash. Rothschild & Co. advised Euronext on the transaction.
Euronext operates listed-derivatives markets as well as stock exchanges in France, the Netherlands and Belgium. Boujnah also bought a stake in another equity market clearinghouse, EuroCCP, in December. The exchange company faces a major threat from LSE’s combination with Deutsche Boerse, and officials in countries where Euronext operates have warned competition regulators to be wary of the deal.
The EU has a March 13 deadline to rule on the Deutsche Boerse transaction. The companies said Dec. 14 that they received formal objections from regulators to their planned tie-up. Such documents detail deal-breakers that may need to be addressed before regulators can give their blessing. Euronext’s deal for the clearinghouse is contingent on Deutsche Boerse successfully acquiring LSE.