The Milan Stock Exchange becomes a takeover target

The London Stock Exchange Plc (LSEG), the operator of the London Stock Exchange - LSE, may spin-off, in part or in full, the Milan Stock Exchange (Borsa Italiana), which it owns, a move that would make it easier for it to obtain European Union approval for the planned acquisition of financial data provider Refinitiv Holdings (formerly the Financial & Risk division of the Thomson Reuters group), a $ 27 billion deal.

"We have launched exploratory talks, which could result in the sale of MTS - the government bond trading platform controlled by the Milan Stock Exchange - or the entire Italian subsidiary," according to a statement from the LSE issued on Friday, quoted by Reuters.

Analysts expect rivals Euronext and Deutsche Börse to submit bids for the LSE's Italian operations. Euronext, which operates six stock markets on the European continent, including those in Paris and Amsterdam, is among the parties that have expressed interest in the Milan Stock Exchange.

According to David Schwimmer, executive director of the London Stock Exchange, the takeover of Refinitiv will be completed by the end of 2020 or the beginning of 2021. However, the LSE official stressed on Friday that a deal to sell off Borsa Italiana is not certain. He was quoted as saying by Bloomberg: "We want to assess whether there are potential benefits in keeping the Italian exchange market as part of the LSE. We are continuing the dialogue with the European authorities, it is constructive".

The acquisition of Refinitiv by the LSE requires several approvals from regulators around the world. The EU has suspended the October 27 deadline for making a decision on the deal, saying it needs more time to respond. In June, the European Commission expressed fears that the combined entity would have a large market share in the trading of European government bond trading segment, as MTS and Refinitiv's Tradeweb platform are already market leaders.

45% of Refinitiv is owned by Thomson Reuters, which owns the Reuters News agency. Its acquisition was decided by the LSE in august 2019. The shareholders of London Stock Exchange voted in November last year to acquire Refinitiv, which is the most important rival of news portal Bloomberg. The deal will significantly expand the financial information division of the LSE, reducing the reliance of the stock exchange operator on trading revenues. Thus, the London Stock Exchange will become a major distributor of financial data.

In March, the London Stock Exchange Group received the approval of the US Foreign Investment Commission for the $ 27 billion takeover of Refinitiv. At the time, the US Commission said the deal did not raise concerns about national security.

In October 2019, Hong Kong Exchanges & Clearing Ltd. (HKEX), the operator of the Hong Kong Stock Exchange, withdrew its takeover bid for the London Stock Exchange Group, as it failed to persuade LSE management to approve the deal. Ever since receiving the bid from the Asian exchange, the London stock exchange operator announced that it remained committed to the process of acquiring Refinitiv, and HKEX stressed, after issuing the bid for the LSE, that the proposed deal would only continue if the takeover of Refinitiv were canceled.

In March, the London Stock Exchange Group received approval from the US Foreign Investment Commission for the $ 27 billion takeover of Refinitiv. At the time, the US Commission said the deal did not raise concerns about national security.

• Unadjusted LSE profit declining

The LSE announced on Friday that it had a pre-tax profit of £ 362 million in the first six months of this year, compared to £ 363 million in the same period in 2019. Earnings per share fell 9% , from 70.7 pence to 64.6 pence.

Profit adjusted before taxes amounted to 553 million pounds, compared to 497 million pounds in the first half of 2019, and earnings adjusted per share rose to 112 pence, from 100.6 pence.

LSE sales increased 4% in the reporting period to £ 1.06 billion, from £ 1.02 billion in the first half of 2019. The group's total revenue rose 8% to £ 1.24 billion.

The LSE has set an interim dividend of 23.3 pence / share, which is 16% higher than in the previous year. The dividend will be paid on September 22 to shareholders registered on August 21st, included.

LSE officials said Friday after the posting of the financial results: "The full impact of the Covid-19 pandemic on our work patterns, customer behavior and product development is difficult to predict, but we in the group have shown that we can adapt quickly and successfully".

The LSE also mentioned that despite the challenges, the British exchange is well positioned to develop its strategic plans to continue to develop its strategic plans and to continue making progress.

• Davide Zanichelli, European MP: "Our government must avoid any separation of the Italian Exchange"

MPs of the Cinque Stelle Movement of Italy have announced on Friday, that they would ask the government in Rome to submit a bid for the Milan Exchange, after the LSE announced it may sell it in part or in full.

"We have submitted a resolution for the government to launch any initiative necessary to submit a competing bid aimed at bringing the Borsa Italiana back under domestic control and avoiding any separation of the group", said MP Davide Zanichelli.

As early as June, Bloomberg wrote that Borsa Italiana could generate interest from Deutsche Börse and the pan-European Euronext market if LSE were forced to sell certain businesses to get the "green light" from European authorities to take over Refinitiv.

Also in June, British publication Financial Times (FT) wrote, citing sources, that the Italian coalition government is debating whether to launch a bid for part or all of the Milan Stock Exchange, as Rome authorities are trying to take control of assets including government bond trading infrastructure.

MTS, the bond trading division of the Borsa Italiana, was launched as a joint project between the Treasury of Rome and the Bank of Italy, to provide banks with a place to bid competitively for bonds. LSEG owns 62% of MTS, through Borsa Italiana, and a consortium of banks owns the rest.

The Italian government is considering expanding the so-called "golden power" in the financial sector and financial infrastructure, which would allow Rome to block or restrict market operations considered a threat to national interests.

According to the mentioned sources, Prime Minister Giuseppe Conte met in the spring with Italian Finance Minister, Roberto Gualtieri, and with Treasury officials, discussing the options for Borsa Italiana and the possibility of granting a mandate to state lender Cassa Depositi e Prestiti to officially hire investment bank Mediobanca as consultant for a possible deal.

LSEG acquired Borsa Italiana in 2007 for 1.7 billion euros. Publication Milano Finanza reported in November last year that Mediobanca estimated the value of Borsa Italiana at 3.5-4 billion euros. Supporters of the eventual acquisition include Prime Minister Giuseppe Conte and the ministers of the Five Star Movement, the anti-government party. They believe that the state should have control of the sovereign bond trading platform, MTS. The mentioned sources said that, if it takes place, the acquisition will be made by Cassa Depositi e Prestiti (CDP), and Mediobanca unofficially consulted Prime Minister Conte on the matter.

However, according to sources, the Ministry of Finance, the largest shareholder of CDP, has a prudent approach. The minority coalition partners - including members of former Prime Minister Matteo Renzi's Italia Viva party - believe the Executive should focus on other priorities, and fear that the nationalization of the Milan Stock Exchange would discourage investors and reduce demand for Italian bonds, according to sources.

"The entire governing coalition agrees that the Italian Stock Exchange is a strategic asset, so it is important to do what is necessary to protect and strengthen it," Claudio Mancini, a member of the Democratic Party, which is part of the ruling coalition, said in June.

Back then, the Ministry of Finance of Rome, Mediobanca and the LSE refused to make any comment on the information published by the FT, and CDP announced: "At this time, we have no case open on such a matter".

Borsa Italiana's operations generated 14% of LSE revenue last year, according to Bloomberg.