On 29 March 2017, the same day that United Kingdom has officially launched the Brexit process, the European Commission (Commission) blocked the proposed 29 billion Euro merger between Deutsche Börse AG (DBAG) and London Stock Exchange Group (LSEG) under the EU Merger Regulation; however, the Commission decision (M.7995) has not been published yet. DBAG and LSEG are the two largest stock exchange operators and own the stock exchanges of Germany, Italy and the United Kingdom, as well as several of the largest European clearing houses. In August 2016, the parties filed a merger notification to the Commission with discussions starting as early as February 2016. Since 2000, DBAG and LSEG have tried to merge three times hoping to create a heavyweight in the European stock market. DBAG had previously already been blocked to merge with NYSE Euronext in 2012.
Commission’s concerns
The Commission was of the opinion that the merger between DBAG and LSEG would have significantly reduced competition and stated that the merger would have led to a “de facto monopoly” in the crucial area of fixed-income instruments (bonds and repurchase agreements) in Europe. The merger would have combined clearing houses in Frankfurt, London, Paris and Rome. The Commission noted that such a monopoly in clearing fixed-income instruments would also have had a knock-on effect on the downstream markets for settlement, custody and collateral management. Furthermore, the proposed merger would have removed horizontal competition for the trading and clearing of single stock equity derivatives based on stocks of Belgian, Dutch and French companies. Because of these competition concerns, the Commission opened an in-depth investigation and issued a Statement of Objections in December 2016.
Proposed remedies
On 6 February 2017, shortly before the 65-day deadline in Phase II, the parties proposed a first remedy package consisting of the divestment of LSEG’s France-based clearing house. However, even though the Commission concluded that this divestment would have resolved the concerns relating to single stock equity derivatives, it was highlighted that this remedy would not have been effective to address the concerns stemming from the creation of a de facto monopoly in fixed-income clearing. This finding was based on the market test of the remedy in which market participants submitted their views. The market test revealed that LSEG’s France-based clearing house’s fixed-income clearing business is vitally dependent on trading feeds from LSEG's Italian fixed-income trading platform MTS. Thus, the Commission concluded on the basis of its own guidelines that the divestment did not provide for a viable and competitive business and therefore did not address its concerns.
The parties submitted another remedy package on 27 February 2017 and tried to address these issues. This remedy package did not include the divestment of MTS, but consisted of a set of behavioral measures. The Commission noted that this was not the clear-cut type of remedy that it was looking for and able to assess in the limited time available and without the option of a further market test. Moreover, the parties were not able to demonstrate that these measures would have been effective in practice and would have ensured that LSEG’s France-based clearing house would be a viable competitor in fixed-income clearing going forward.
The Commission came to the conclusion that the parties failed to address its competition concerns and, therefore, prohibited the merger. The parties neither could rebut these concerns nor propose adequate remedies.
Conclusion
The Commission’s veto of the merger was not surprising after LSEG’s prior announcement not to accept the Commission’s demands to sell MTS. The parties had the opportunity to address the Commission’s concerns with a clear-cut remedy but decided against it. LSEG Board concluded that taking all relevant factors into account, and acting in the best interests of shareholders, it could not commit to the divestment of MTS.
This is the second time Commissioner Vestager has blocked a deal after an in-depth investigation, O2/Hutchinson being the first. Other significant deals are in the pipeline of the Commission’s merger units and developments in this case will give companies an incentive to deal with Commission’s concerns even earlier and have clear-cut remedies ready when they are needed which requires these remedies to be designed as early as possible. Commissioner Vestager noted that the later the Commission gets the proposals, the less time it has to review them, and the less time the parties have after the market test to improve them.
The deal also clearly fell into a difficult political climate where the future of the city of London as financial center is at stake and banks are actively taking action to deal with the potential fallout of Brexit.
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Upcoming Antitrust Conference of Interest: Sheppard Mullin Antitrust & Competition Group Co-Chair Mike Scarborough will be speaking at the International Developments in Private Competition Litigation Conference on April 27th in Madrid, Spain. Mike will discuss the defendants’ perspective of managing the legal risks of international cartels in the “How Do Companies Resolve Worldwide Claims – What are the Risks and Opportunities” session. Cuatrecasas and RBB Economics, in collaboration with the CNMC and Universidad Carlos III de Madrid, are organizing this third annual event.