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LSE says it has financial firepower to ride out EC probe into Refinitiv deal

London Stock Exchange Group PLC still aims to close its $27 billion deal to acquire financial data firm Refinitiv US Holdings Inc. by year-end, saying it has sufficient financial backing from its banks to cope with a long probe, as it faces a four-month delay pending further investigation by European regulators.

The European Commission said June 22 it will launch a further Phase II probe into the deal after LSE offered no concessions during the initial investigation. Though a Phase II investigation typically lasts four months and the EC said it will report by Oct. 27, it can be still be extended by the EU executive body.

"Financial markets provide an essential function for the European economy. Access to financial market infrastructure and financial data products is needed to make investment decisions, trade, and to protect savings," European Competition Commissioner Margrethe Vestager said. "We have opened an in-depth investigation to assess whether the proposed transaction which will combine the activities of [LSE] and Refinitiv would negatively affect competition in these markets."

Bridging finance

In a June 22 statement, LSE said it was committed to completing the deal by year-end, and that it continued to engage constructively with the EC. The company's CFO, David Warren, has previously stated that the transaction is sufficiently backed to cope with a delay, saying in the company's first-quarter earnings call in April that it is syndicated to 18 different banks with bridging finance that could be extended to 2021 if needed.

"There are really very few outs in this when we negotiated the bridge," he said. "We considered and tested and established for ourselves sufficient headroom so that we would not be in a situation where the banks could step out of their commitment to fund."

The company is likely to update the market further when it publishes interim results in July. In April, it won approval from the U.S. Committee on Foreign Investment, which ruled that there were no national security concerns associated with the deal.

CEO David Schwimmer said at the company's first-quarter earnings call that the "drop-dead date" for the transaction is May next year, though even this can be extended with the agreement of both parties.

Italy keeps an eye on the deal

The deal has attracted political attention in Italy as LSE owns Borsa Italiana SpA, the Milan-based stock exchange, which includes MTS, the key trading platform for Italian sovereign bonds.

Italian Economy Minister Roberto Gualtieri said June 15 that the Italian government was watching the LSE-Refinitiv deal closely, according to The New York Times. The Financial Times reported early in June that Italy's ruling coalition has discussed whether to bid for all or part of Borsa Italiana, as part of a move to take control of strategic assets, and that the Italian government has considered whether to instruct Cassa depositi e prestiti SpA to hire Mediobanca - Banca di Credito Finanziario SpA as an adviser. However, there is reported to be caution among other members of the Italian government's coalition about such a deal.

LSE previously said it had no plans to sell its Italian arm, the FT said. Euronext NV, which operates six exchanges across Europe, had expressed an interest in Borsa Italiana.

However, bond trading platform MTS, 62.5%-owned by LSE via Borsa Italiana with the remainder owned by 19 dealers, is regarded as a likely potential divestment to satisfy regulators, according to analysts at Keefe, Bruyette & Woods Inc. In a June 15 research note, it estimated that a sale of MTS could be worth up to €1.10 billion for LSE.

"We believe that MTS, in a sale situation, could draw the attention of nearly all global exchange operators," Keefe, Bruyette & Woods said, citing Deutsche Börse AG, Euronext and MarketAxess Holdings Inc. as three of the most likely acquirers.

Analysts at financial services research firm Autonomous noted that LSE has consistently said it has no desire to sell its Italian operations and said regulators may struggle to force it to do so.

"In the absence of strong competition-based arguments against the proposed combination with Refinitiv's businesses we see no obvious levers at either the EU or Italian level to require LSE to sell," Autonomous wrote in a June 2 note to investors, which stated that it regarded the chances of either Euronext or Deutsche Börse acquiring Borsa Italiana as very low.