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Why Everyone Cares About This Italian Exchange

A pedestrian passes Italy’s Stock Exchange, the Borsa Italiana which is part of the London Stock Exchange Group Plc, in the Piazza Affari in Milan, Italy, on Thursday, July 28, 2011. Italian Prime Minister Silvio Berlusconi survived a confidence vote on a bill critics say will help shield him from prosecution, ending a week of turmoil after bond yields rose on speculation Finance Minister Giulio Tremonti may quit. (Photographer: Bloomberg/Bloomberg)

At first glance, it’s a tiny deal — a mere formality in unlocking a much bigger transaction to transform the strategy of the London Stock Exchange Group Plc. But there’s a lot at stake in the U.K. bourse’s attempt to sell its holding in Italy’s MTS SpA bond-trading platform. The disposal has consequences not just for the LSE’s rival exchanges, but also for Italy and for Europe’s capital markets.

MTS is a critical piece of European bond-market infrastructure with average daily volumes exceeding 100 billion euros ($119 billion). Its importance is reinforced by the fact that it’s the key venue for trading Italian government debt.

LSE last month kicked off a sale process for its controlling stake in the business, hoping to garner European trust-busters’ approval for its $27 billion deal to buy data provider Refinitiv. The European Commission is concerned the combination could diminish competition in the electronic trading of European government bonds because Refinitiv controls Tradeweb Markets Inc. Being smaller, MTS is the easier sacrifice to get the deal done.

Refinitiv competes with Bloomberg LP, the parent of Bloomberg News.

Exchange assets are scarce and attract buyers easily. But the complicated political and competitive backdrop means that LSE can’t just assume MTS will sell itself without snags.

First, LSE’s move is preemptive and it’s not yet clear an MTS deal would be enough to remedy the Commission concerns. Even if it does, Italy needs to get on board too. That complicates matters because because state-controlled postal savings bank Cassa Depositi e Prestiti SpA is also an interested buyer, potentially in partnership with Paris exchange-operator Euronext NV and Italian lender Intesa Sanpaolo SpA.

And it’s very possible Rome could push for LSE to make a clean exit from Italy altogether. That would mean finding a buyer for Borsa Italiana SpA — the holding company not just for the MTS stake, but also the Milan stock exchange — potentially limiting the number of interested parties. Analysts at Bank of America Corp. reckon MTS could be worth around 600 million euros, and Borsa Italiana 3 billion pounds ($3.9 billion).

For the LSE, this isn’t about getting the best price for either asset. It just needs to get the Refinitiv deal done. LSE’s market value is up 11 billion pounds, nearly 60%, since last July — largely on investors’ hopes for the transaction.

These dynamics look advantageous for Euronext. Borsa Italiana would be a good fit. But Euronext would struggle to afford the acquisition on its own, so partnering with Rome makes sense.

Deutsche Boerse AG has the financial muscle. But why would it want to do anything that helps LSE buy Refinitiv? The surprise tie-up abruptly killed the Frankfurt exchange’s talks to buy some of Refinitiv’s foreign exchange assets. MTS is small relative to the German company’s overall business and Borsa Italiana would bring more equities trading, straying from its stated priorities.

As with all exchanges, national politics matter. A U.S. or Asian bidder would be brave. A European deal for MTS or Borsa Italiana could burnish the credentials of Paris or Frankfurt to be a leading financial center after Brexit — but which one? If Italy strong-arms itself into the process, that would reinforce investor concerns about its tendency to intervene in free markets.

So MTS is a big deal after all, and a tricky one. Luckily for LSE, it has an alternative option — offering to sell Tradeweb instead. It probably won’t want do go down that route. Nor will Europe want to lose the chance to repatriate ownership of this hugely symbolic financial platform. But reconciling the conflicting European interests here will not be easy.

(Corrects estimated value for Borsa Italiana in 7th paragraph.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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