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Euronext deal set to bring Irish Stock Exchange Brexit benefit

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Euronext deal set to bring Irish Stock Exchange Brexit benefit

Euronext NV's takeover of the Irish Stock Exchange will help the Dublin bourse develop its debt and fund listings by taking advantage of Brexit-related market ructions and the liquidity provided by the Dutch exchange group, according to analysts.

The deal, which is expected to close by March 2018 pending regulatory approval, will see Amsterdam-based Euronext buy the Irish exchange for an enterprise value of €137 million.

Euronext is gambling that, after Brexit, ISE will acquire new listings from funds moving to Dublin to retain so-called passporting rights, while its platform for exchange-traded funds stands to benefit from "a secular shift into passive investing," Steve Grob, strategy director at financial services support firm Fidessa, told S&P Global Market Intelligence.

Britain's vote to leave the EU has left U.K.-based financial services firms concerned that they will lose access to the European single market using passporting arrangements, whereby a company headquartered in one EU country can easily sell services in any other.

The deal positions ISE to "make the most of Brexit," its CEO, Deirdre Somers, said Nov. 30.

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Debt and fund specialist

ISE chose to specialize in specialist listings for debt and funds instruments and special-purpose vehicles after the 2008 financial crisis caused a rapid decline in equity listings from Irish companies, especially in the banking, property and construction fields, said Constantin Gurdgiev, an economist at Trinity College Dublin, in an interview.

At the end of November 2017, 39 companies were listed on the ISE's main equity market and 18 on its smaller-business market, with market capitalizations of €84.67 billion and €3.5 billion, respectively. By comparison, on the same date, there were 1,469 funds and subfunds listed and 5,505 other classes of debt, which provide three-quarters of ISE's revenue.

Many of these listings are more specialist, smaller market issues aimed at institutional investors, which are best suited for smaller exchanges, Gurdgiev said.

Most ISE-listed funds are managed overseas — 39% of their managers are based in the U.K., followed by 24% in the U.S. — but domiciled in Ireland. More than 77% are domiciled locally, followed by 7.6% in the Cayman Islands and 5.2% in Jersey. Just 4.7% of fund managers listing on the ISE were located in Ireland.

The strategy to specialize has brought the ISE revenue growth in each of the last three years, Somers said on a Nov. 30 conference call with analysts.

The firm generated more than €29 million of revenue in 2016, up from €28 million in 2015 and €25 million in 2014, mainly on the back of active listings of debt instruments. Earnings before interest, taxes, depreciation and amortization in the first nine months of 2017 were up 22% from the same period of 2016, at €8.5 million.

A combined Euronext/ISE company may produce annual revenues of about €530 million, S&P Global Market Intelligence figures show.

Liquidity concerns

But ISE's pivot from equity to fund and debt listings has had downsides, mainly a lack of liquidity in the Irish markets coupled with thin analyst coverage for ISE-listed stocks, said Gurdgiev. He predicted that the Euronext tie-up would help repair both shortcomings, calling the arrangement a "lifeline."

In liquidity terms, Euronext, which has said it aims to double in size, is now "leveraging a network of different clearing centers, which can offer liquidity to each other," with its existing operations in France, Belgium, Portugal, the Netherlands and the U.K forming a "single cross-country liquidity pool," said Bepi Pezzulli, chairman of Select Milano, a capital markets think tank. He said that, in a post-Brexit world, "this model works magic," and that analyst coverage will increase as each of these exchanges uses Dublin for debt and fund listing.

Euronext will be targeting €6 million of annual cost savings by the end of 2020 and seeking to remove duplicate functions, its London head Lee Hodgkinson said on the Nov. 30 conference call.

This will mean moving some of ISE's positions to elsewhere in the group. ISE's trading systems, run by Deutsche Börse, will move to Euronext's own systems. On the other hand, he said, Euronext plans to extend new offerings to ISE following completion of the purchase, including additional financial derivatives based on Irish listings, and futures and options linked to agricultural commodities.

Brian Taylor, a U.K.-based exchanges consultant, said stripping ISE down to "a pure sales office" would be an error, but that the deal provided an opportunity to apply ISE's "great range of products and marketing" across the Euronext group.

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