LSE merger with Deutsche Boerse 'highly unlikely' to complete

The London Stock Exchange Group said its proposed merger with Deutsche Börse is unlikely to be approved by the European Commission, after competition regulators came up with "unexpected" demands last week.

In a statement on Sunday the exchange said: “Based on the Commission’s current position, LSEG believes that the Commission is unlikely to provide clearance for the merger."

Analysts agreed that the deal now looked very unlikely to complete.

Although the LSE had made an improved offer to sell parts of its clearing arm in order to clear competition hurdles, it felt a request by the EC to divest its ownership stake in MTS, an electronic trading platform for European government bonds and other fixed income securities, was a "disproportionate" step for the company.

LSE said any change of control of MTS would require approval from the Italian authorities, which are not keen on the idea, "and would trigger parallel regulatory approval processes in other jurisdictions including the UK, Belgium, France and the USA".

The company refused to commit to the divestment and will not be submitting a remedy proposal, which had been requested by the Commission by 1100 GMT on Monday.

"Nevertheless, the LSEG Board remains convinced of the strategic benefits of the merger and recognises the strong support from shareholders for the transaction," it said. "LSEG will continue to take steps to seek to implement the merger."

Ahead of preliminary results due on 3 March 2017, the FTSE 100-listed company said its expects to report "strong progress across all business areas" and that it has "continued to invest to drive multiple growth opportunities".

Shares in LSE were trading sharply lower as it becomes clear that the merger was on a knife-edge, with its shares having traded up around 50% since the merger was first mooted last February and topped 3,000p this year.

"There is a long, long way to fall if this tie-up dies," said analyst Neil Wilson at ETX Capital. "The regulatory hurdles were always a risk and with Brexit there are additional hurdles to clear that seem close to insurmountable now.”

Broker Numis said while LSEG will continue to take steps to try complete the merger, "we believe it is highly unlikely this deal will now complete".

"Although we like the LSEG on a standalone basis, we believe the shares have had a very strong run recently and are likely to come under pressure as the market looks to remove the bid premium currently being ascribed to LSEG," which is seen at around 22 times 2017 expected earnings.