After months of scrutiny by regulators, it emerged last night that the proposed merger between the London Stock Exchange Group (LSE: LSE) and Deutsche Boerse is now unlikely to go ahead as the deal is not likely to make it through European Commission scrutiny.
In a press release issued late in the evening on Sunday, the LSE announced that the company had not been able to come up with a plan to sell its 60% stake in MTS, a fixed-income trading platform, as demanded by the Commission. The group had already agreed to sell part of its clearing business LCH to satisfy competition concerns but then earlier this month the Commission made the surprising demand concerning MTS.
The Commission had given the exchanges until Monday to come up with a proposal to meet that demand.
The MTS enforcement action proved to be a huge headache for both of the exchanges. LSE notes that such a sale would require regulatory approval from several European governments and the divestment would hurt existing business. Therefore, the group is declining to make the sale.
“Taking all relevant factors into account, and acting in the best interests of shareholders, the LSE Board today concluded that it could not commit to the divestment of MTS,” said the Sunday night press release. As a result, “based on the commission’s current position, LSE believes that the commission is unlikely to provide clearance for the merger” the release concludes.
Time to sell?
Following yesterday’s announcement, shares in both the LSE and Deutsche Boerse are trading down today, but shareholders shouldn’t rush to exit their positions. Indeed, over the past five years, LSE has created an enormous amount of wealth for shareholders, and this is unlikely to end just because the merger has been called off. Shares in the LSE are up 222% since the beginning of March 2012, excluding dividends. City analysts are expecting the firm to report earnings per share of 119p for the year ending 31 December 2016, up 28% over the past five years. Over the same period, revenue has roughly doubled.
The LSE’s growth over the past few years has come thanks to its consistent innovation and expansion into overseas markets. A desire to offer an improved service to customers has helped the group remain relevant at a time when equity markets are becoming increasingly fragmented. The merger with Deutsche Boerse was supposed to help the enlarged group compete better with smaller peers and reduce costs. With the merger now unlikely to go through, the LSE will have to take a different route to improve growth and margins. Expansion into Deutsche Boerse’s markets may prove to be a lucrative growth channel for the business.
The bottom line
Put simply, I do not believe that it is time to sell shares in the LSE following the news that the merger with Deutsche Boerse is now off. The LSE has proven it can succeed as a standalone company and that is unlikely to change any time soon.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.