By Alessandro Continanza (ESCP Business School), Alexander Guenther (Vienna University), Nina Tagliabue (University of California, Berkeley), and Rayan Singh (University of St. Gallen)
Target: Borsa Italiana
Estimated value: € 4.3B ($5B)
Announcement date: October 9th, 2020
Acquirer Advisors: Mediobanca and JP Morgan
Target Advisors: Goldman Sachs, Barclays, and Morgan Stanley
Bidder Information (Euronext)
Company Overview (Source)
Euronext is the largest stock exchange group in Europe. They operate key exchanges in the region such as Paris, Amsterdam, Brussels, and Oslo among other cities. Euronext is a publicly-traded firm, since the spin-off from Intercontinental Exchange in 2014. Euronext has been through a number of ownership changes, with another key example the merger with the New York Stock Exchange in 2011. It’s history dates as far back as 1602 and the Dutch East India Company.
CEO/Chairman: Stéphane Boujnah
Number of employees: 1,069
Key shareholders: Euroclear S.A./N.V. (8%), Caisse des Dépôts et Consignations (8%)
Market cap: €6.205B
EV: € 6.911B
LTM Revenue € 838.1M
LTM EBITDA: € 399.4M
LTM EV/Revenue: 8.25x
LTM EV/EBITDA: 13.90x
Figure 1. Comps Table Euronext (Starmine Peers)
The Borsa Italiana Group is the integrated Italian market infrastructure with operations diversified across regulated markets, ELITE, fixed income trading, central counterparty clearing (CC&G), a central securities depository and other business lines.
CEO/Chairman: Rafaelle Jerusalmi
Number of employees: 4,587
Key shareholders: London Stock Exchange Group
Summary of Financial info
Market cap: N/A (privately held)
EV: (taken from peer analysis Figure 2) € 5315.6 million
LTM Revenue: € 477.9 million
LTM EBITDA: € 278.4 million
LTM EV/Revenue: 11.12x
LTM EV/EBITDA: 19.09x
Figure 2. Valuation of Borsa Italiana Based Off Industry Peers (Starmine Peers)
Euronext announces that it has entered into a binding agreement with London Stock Exchange Group ("LSEG") to acquire 100% of shares in London Stock Exchange Group Holdings Italia SPA, the holding company of the Borsa Italiana Group, for a cash consideration of €4,325 million.
The deal will create the leading pan-European market infrastructure, with the newly formed group benefiting from revenue diversification and a wider geographical footprint. Thus, it will be better positioned to deliver the ambition to further build the backbone of the Capital Markets Union in Europe. The combined group will operate exchanges with more than 1,800 listed companies and an aggregate market value of around €4.4 trillion. Moreover, it will be the main venue for secondary markets in Europe, with €11.7 billion worth of equities traded on a daily basis. Also, it will take the lead in equity financing, with more than €42 billion raised in 2019 from investors to finance companies across Europe.
The deal seems modestly priced at an estimated value of € 4.32 billion, compared to Borsa Italiana’s estimated enterprise value of € 5.32 billion using the average of the EV/EBITDA and EV/Sales multiples comparison approaches in Figure 2. The comparable companies represent similar European exchange operators and similar business models. When also taking into consideration the control premium that Euronext has to pay in the deal, the price paid from this perspective seems very reasonable. However, when looking at only the EV/EBITDA multiple of competitors, Borsa Italiana’s estimated enterprise value is a far lower €3.6 billion, which would make the deal at a premium to its enterprise value.
By combining their strong listing franchises, the two exchanges will facilitate access to equity financing for companies, strongly focusing on small and medium-sized enterprises (“SMEs”), family-owned and tech companies. Indeed, the goal is to develop an international business support and capital raising platform for ambitious and fast growing companies, called "ELITE". Moreover, while Borsa’s bond trading platform MTS will give Euronext its first foray into fixed income trading, the french single order book will offer the Milan based stock exchange a unique gateway to investors in accessing the largest liquidity pool in Europe. Moreover, the addition of Monte Titoli will more than double the size of Euronext’s CSD franchise, increasing assets under custody from €2.2 trillion to €5.6 trillion.
The deal is expected to enhance both companies' businesses across all their segments. This complementarity is expected to lead to greater benefits for investors, issuers and shareholders, creating a more comprehensive offering under a resilient business based on a strong core of services. The proposed combination will provide compelling shareholder benefits since the transaction is expected to be immediately accretive on adjusted EPS before synergies. Moreover, it is expected to deliver double digit accretion including run-rate synergies in year 3. The € 4.325 million will be paid in cash to LSEG at closing. The financing is fully secured through a bridge loan facility, underwritten by a group of banks. It includes €300 million of use of existing cash, €1.8 billion of new debt as well as € 2.4 billion of new equity to be issued. The equity issuing concerns a private placement to CDP Equity and Intesa Sanpaolo which amounts to €0.7 billion and a rights offer to Euronext's existing shareholders.
Euronext's governance will welcome several Italian representatives, since the country is now the group's largest revenue contributor. Moreover, both CDP Equity and Intesa Sanpaolo will join the group of Euronext's long-term Reference Shareholders, which will further support the two stock exchanges' growth ambitions, thanks to its strategic investors long term investment horizon. The Borsa Italiana Group will maintain its current functions, structure and relationships within the Italian ecosystem and preserve its Italian identity and strengths. Thus, the Italian CEO of the Borsa Italiana Group will join the Managing Board of Euronext. Finally, key businesses and some central functions of the combined group will be based in Milan and Rome and the leadership of the group finance function will be located in Milan.
From LSE's side, this deal will bring them one step closer to winning approval for its highly anticipated purchase of Refinitiv for $27B. Refinitiv is a data provider, 45% owned by the parent company of Reuters News, Thomas Reuters Corp. The reason for the divestment of Borsa was to ease the concerns the European Commission has over LSE controlling the European bond market; there has been significant regulatory scrutiny over the proposed deal with Refinitiv. In fact, the transaction's completion depends upon European authorities allowing for the Refinitiv acquisition to go through. LSE has said they would have preferred to keep their Italian arm, but are reassured from the sale given they will make a considerable profit; the 2007 purchase of Borsa was for €1.6B.
"We believe the sale of the Borsa Italiana group will contribute significantly to addressing the EU's competition concerns.”
The valuation— 16.7x EV/adjusted 2019 EBITDA — is around the average for global exchanges. Therefore, the agreed amount is a reasonable price for LSE considering the Italian business' skew to cash trading and clearing.
For Euronext, the acquisition of Borsa marks a turning point in their history. By welcoming the third-largest economy in Europe, Euronext can diversify their revenue streams and geographical footprint. The sale has opened the doors for them to build the leading pan-European market infrastructure as well as creating the backbone of the European capital markets union, according to Euronext CEO Stephane Boujnah. This new opportunity will be streamlined from the integration of MTS, Borsa's bond trading platform, which will enable Euronext to enter into fixed income trading for the first time. Rather than from job cuts, the purchase's synergies will most likely be coming from adopting Borsa's MTS technology platform. While the deal is requiring €1.8B in debt and €2.4B in new equity in funding, the acquisition gives the French operator 25% of all equity trading in Europe and a clearinghouse for the first time. Euronext will also see an improvement in their equity operations, the joint group operating with more than 1,800 listed companies—an accumulated market value of around €4.4T.
On the day the deal had been announced, October 9, shares in LSE rose 0.2% in early trading. The group’s shareholders are confident about their decision to sell Borsa since the deal will bring Refinitiv’s acquisition one step closer. On the same day, shares closed 0.4%. Euronext saw a 0.6% rise in their shares in early trading on the news of the deal as shareholders unanimously backed the deal. However, Euronext’s stock saw a decline of 4.4% at closing, which could suggest dissatisfaction by investors for Borsa.
Figure 3. Euronext Price Development (SeekingAlpha)
With high market volatility caused by rising COVID-19 cases across Europe and stricter lockdown measures, there have been sporadic decreases on the European markets (see Figure 3). On October 28 shares in both LSE and Euronext closed down by 6.2 and 9.9%, likely as a result.
Adding Borsa Italiana to its collection of European stock exchanges, Euronext expands its position as one of the most important owners of market infrastructure in Europe. Stéphane Boujnah, chief executive of Euronext, called the deal “a turning point in our group’s history”, stating that the transaction “will create the backbone of the Capital Markets Union in Europe”. Euronext’s acquisition of Borsa Italiana makes Italy the largest contributor to the group, reflecting the deals’ long-term strategic importance.
Involving Borsa Italiana in its transnational consortium of stock exchanges allows Euronext to expand its operations with respect to its tremendous reach and impact on European capital markets. Its venues would be home to a quarter of Europe’s €30bn-a-day trading in equities, reflecting the extensive consolidation and reach of Euronext’s products and platforms. The contribution of Italy as a G7 economy allows the group to build on existing structures in Dublin, Oslo, Paris and other European countries, expanding its network to more potential customers and adding to its over 1,463 listed companies. This will allow the group to further connect markets and allow easy-to-access opportunities for investors. After gaining access to the Italian market, this long-term positioning will allow Euronext to concentrate on expanding its product and platform diversity, while continuously adding depth to operations in Italy.
The deal gives Borsa Italiana a clearinghouse for the first time as well as a securities depository, stock exchange and bond platform. As a result, Euronext’s Mr. Boujnah also expressed that revenue synergies from the deal would mainly be achieved by moving Borsa Italiana to Euronext’s technology platform rather than through job cuts. Access to this technology platform will allow Borsa Italiana to benefit from a greater variety of products and new clients through faster and more digital processes. These long term revenue synergies are extended by creating a network of integrated platforms of transnationally connected stock exchanges, accumulating European investors on their platform. By fostering Italy’s market diversity in bond and equity markets, as well as giving access to new technology, Euronext’s transferred capabilities will allow Borsa Italiana to achieve long term growth within the firm and generate efficiencies for investors.
Finally, the deal contains essential impacts on Italy’s political and economic landscape. In the long run, involved stakeholders are hoping for the deal to contribute to the Italian economy by giving investors easier access to markets but also through political ties established for the transaction. Borsa Italiana is seen as a strategic asset in Italy because of its ownership of MTS SpA, a platform used to trade government bonds. While this made the deal politically sensitive, Euronext executed the transaction by teaming up with state agency Cassa Depositi e Prestiti (CDP) and Italy's biggest bank Intesa SanPaolo. Cooperating with central Italian financial institutions will add to Euronext’s powerful position in European markets and increase flexibility in its operations due to direct access to decision makers in the country.
Barriers to the closure of the deal
A strong motivating factor behind LSE’s sale of Borsa Italiana is the desire to meet the anti-competition concerns of the E.U. ahead of their planned $27B acquisition of Refinitiv. However, if there are significant changes to LSE’s commitment to the deal, the Borsa Italiana sale may be in jeopardy. Included in the terms of the agreement is a contingency on the Refinitiv deal going through. Therefore, if LSE attempts to withdraw from the Refinitiv deal by citing any of the exit clauses in that contract, the Borsa Italiana deal would likely not go through.
LSE may also be forced to not go through with the acquisition if the commitments that the LSE group makes to address anti-competition concerns are not enough to satisfy the E.U. regulator. For instance, LSE recently had to make commitments to keep its trading business separate from its interest rate derivatives clearing business. If LSE is unable or unwilling to make further commitments to meet the demands of the E.U. regulator and abandons the Refinitiv deal, they could swiftly turn around and look for the legal remedies they have included in the Borsa Italiana sale agreement to walk away from the transaction.
Further, other remedies to meet E.U. regulators’ demands may also be successful. If measures less severe than the sale of Borsa Italiana suffice, LSE may look for options to walk away from the deal. Recent threats by LVMH to walk away in their agreed deal to purchase Tiffany’s illustrate the extent to which deals that have already been agreed to can still be amended. LSE could potentially use better circumstances in their negotiations with regulators to keep a hold of the valuable Borsa Italiana asset.
As part of the agreement, both companies LSE and Euronext had to gain shareholder approval of the deal. Results at LSE’s general meeting overwhelmingly supported the deal; 291,694,564 votes for and only 4,193 submitted against. This is likely due to the appeal of the Refinitiv transaction, which is contingent on this sale.