By Geoffrey Smith
Investing.com -- The biggest stock exchange deal in Europe in years is finally complete. London Stock Exchange Group (LON:LSE) said on Friday it’s agreed to sell Borsa Italiana, which includes the historically lucrative MTS trading platform for Italian bonds, to Euronext (PA:ENX) for 4.325 billion euros ($5.1 billion).
While not a transformative deal in itself for either, it’s a substantial win for both parties, as Euronext, which owns the Paris, Amsterdam and New York stock exchanges, gets to strengthen its presence in the European Union’s biggest bond market while LSE gets over one of the biggest stumbling blocks in the antitrust review of its deal for Refinitiv.
Refinitiv is the rebranded data operation of what used to be called Thomson Reuters (NYSE:TRI) before it was bought by a Blackstone-led consortium back in 2018 (Blackstone (NYSE:BX) reportedly is set to double its money in the process).
LSE originally agreed to buy it for $27 billion over a year ago, but the acquisition, which promises to make LSE a worldwide competitor to Bloomberg in the sale of financial market data, has been stuck in Brussels amid concern about a possibly excessive concentration of such data.
The review hasn't been made easier for either the EU or LSE by the fact that the U.K. is trying its hardest to put itself outside the reach of EU regulation and has sent increasingly strong signals that it intends to go its own way as soon as the post-Brexit transition period ends on December 31st.
LSE said it now expects the Refinitiv deal to go through by early 2021.
LSE’s shares have risen by over 56% since the deal was first announced, and anticipation of the Borsa Italiana deal closing has kept them well bid in recent weeks. The shares rose another 0.5% on Friday. Euronext shares, which have participated in full measure in the frothing rally of financial marketplace stocks this year, fell 3.7% but they’re still up by one-third year-to-date.
The deal comes just at a time when doubts are starting to emerge about the value of that MTS franchise. Trading Italian bonds was a fantastically profitable thing to do when volatility was high during the euro crisis, but the EU’s recovery fund and the European Central Bank’s 1.35 trillion euro Pandemic Emergency Purchase Program – the ultimate monetary fire blanket – have dampened volatility in a market worth over 2 trillion euros.
Just as importantly, recent local elections suggest Italy’s long flirtation with the kind of populist agenda that infuriates its Eurozone neighbors to the north is fading. That’s allowed Italian 10-Year bond yields to plummet to a record low of 0.73%, with the spread over 10-year German bonds also falling to its lowest in four years, at a mere 127 basis points.
That trend decline in volatility has also been visible elsewhere recently, in interdealer broker TP ICAP's (LON:TCAPI) decision to spend $700 million on U.S. equity trading platform Liquidnet, in an effort to grow beyond its traditional swaps and bond businesses.
If the death of bond volatility in the post-pandemic world turns out to the broader phenomenon that many say, that will play to Refinitiv's strengths in foreign exchange and equity indices, which is where volatility is migrating to, at the expense of Bloomberg, which is still largely a fixed-income powerhouse. While LSE's owners might not have been able to foresee that when they made their move, it looks an even cleverer deal now than it did 12 months ago.