LSEG's $27bn Acquisition of Refnitiv

Acquisition Summary

The European Commission has approved the London Stock Exchange Group’s (LSEG) $27bn acquisition of financial-data provider Refinitiv. The deal, which LSEG shareholders agreed to in November 2019, arguably reflects the desire to bolster recurring revenues and generate trading-related synergies and other efficiencies. The highly levered purchase also occurs with the backdrop of wider consolidation by stock-exchange operators, with Intercontinental Exchange and S&P Global striking landmark transactions in the past 6 months. However, taking on Refinitiv’s $12.5 bn net debt does seem to augur well for LSEG shareholders, with the prospect of funds being diverted for refinancing and away from dividends.

Deal Structure and Financing

LSEG has been required to make several concessions in order to gain approval from competition regulators in Brussels. The UK group has sold the owner of the Milan stock exchange Borsa Italiana to Euronext for €4.3bn and also disposed of a prominent trading platform in European sovereign debt. As a result, the transaction sees Euronext, the largest stock exchange in Europe, grow to become an even more significant market operator and hence competitor to LSEG within the EU, operating seven stock exchanges, a clearing house and a sovereign-debt venue as well. Other compromises were also made by the London-based group. In order to prevent LSEG’s acquisition from stifling competition in the supply of financial data and trading of sovereign debt, the company has pledged that it will provide access to its foreign exchange and equities trading data for the next decade.

The LSEG declared that it would finance the $27bn purchase through the issuance of $14.5bn in new shares, and also incur $12.5bn of Refintiv’s existing debt. The group is acquiring Refinitiv from a private-equity consortium headed by Blackstone, which is set to hold a 37% ownership stake in the combined entity after the transaction is completed.

LSE Overview

The 323-year-old London Stock Exchange Group (LSEG) is a financial-information and stock exchange firm. The company owns (and is listed on) the London Stock Exchange and, prior to the transaction, also owned the Italian Stock Exchange Borsa Italiana. To win favour of antitrust regulators, Borsa Italiana was sold in November 2020. The group has a notable presence in post-trading markets, particularly in clearing through its London clearing house (LCH). LSEG similarly provides custody and settlement services as well as index, data and other financial-information-related products.

Refinitiv Overview

Refinitiv is a prominent provider of financial-markets infrastructure and data, servicing over 40,000 institutions in a total of 190 countries. The New-York-based business has consolidated desktop solutions via its product Refinitiv Workplace (previously known as Eikon), real-time data feeds through its Electron platform and also other non-real time data feeds. Refinitiv is notably active in the foreign-exchange benchmarks sector in indices markets, where it supplies its flagship WM/Reuters FX benchmark.

Industry Insight

Exchange owners have been growingly cementing their presence in the market for financial data. For instance, the approval of LSEG’s acquisition comes merely 5 months after the New York Stock Exchange owner Intercontinental Exchange purchased mortgage-data-provider Ellie Mae for $11bn, the largest deal in its 20-year history.

Another key sector which the combined entity operates in is the clearing market. Clearinghouses, such as the LSEG-owned London Clearing House (LCH), act as intermediaries between sellers and buyers. These organisations finalise (or “clear”) and validate transactions and ensure that both parties honour their contractual obligations. All financial markets have either an internal clearing division or a designated clearinghouse in order to implement such services.

The UK clearing market in particular is likely to experience key changes following Brexit. The European Commission’s decision to allow US clearing houses to operate throughout the EU is likely to undermine the dominance of the Square Mile in this market, with clearing houses in the City of London only permitted to operate in the EU until June 2022. The clearinghouse’s presence in over-the-counter (OTC) trading may be affected particularly adversely. LCH itself oversees the majority of EU OTC trading, the process of how securities trade through a network of firms buying and selling securities on their own account as opposed to being traded on a centralised exchange. Hence, LSEG may be particularly adversely affected by this loss of the right to clear euro-denominated transactions in euros, which may aid to explain acquisition of Refinitiv as a means of raise its financial-data-provision capacity.

To read the full report, visit https://www.manda-discovery.com/blog and have access to:

- Diversification & Scale Opportunities

- Industry Overview

- Cost Synergies

- Long term prospects

Written by Alexander McFazdean (Oxford University)