Chris Hughes is a Bloomberg Gadfly columnist covering deals.
Who would have thought? The tie-up between London Stock Exchange Group PLC and Deutsche Boerse AG is all but dead thanks to regulatory opposition. Fingers are pointing at Italy and the European Commission. But if it wasn't them, it would probably have been supervisors in Britain or Germany. The situation leaves losers all round.
The British and German exchanges had been working for more than a year on easing regulatory concerns to a merger that was backed by their respective shareholders. The LSE has now effectively pulled the plug, blaming the EC's "disproportionate" demand for a sale of its controlling stake in Italian bond-trading unit MTS Spa. Such a move, the LSE implies, would have irked the Italians, so it may not really be possible. Therefore, the British company isn't going to play ball.
Brussels still needs to formally block the merger, but it's hard to see how it gets through this impasse. The LSE's reasoning is odd. One obvious suitor for MTS is Euronext NV, which is already picking up another deal-driven LSE disposal. Maybe Italy would have blocked such a transaction. But surely an alternative buyer for MTS could have been found. Yet, LSE has decided not to seek one for the greater good of combining with Deutsche Boerse.
It's clear from the way this episode has been handled that relations between the LSE and its betrothed have become poor. LSE called it a day. Deutsche Boerse is left in the lurch.
Why has the LSE been so hard-nosed? One explanation is that it could see the deal failing anyway and the MTS issue was as good a moment as any to kill it rather than face more awkward battles. Even with EC approval, the merger would still need a firm yes from the Bank of England and the German state of Hesse.
The current deal structure, with a British-based holding company, doubtless suited the BoE but would have been hard for Hesse to swallow, especially with Brexit looming. Switching the deal to be German-headquartered may just have irked the Brits and would, in any case, have required the whole transaction to be redrawn and put to shareholders afresh. A compromise – promising to redomicile the enlarged group post-Brexit – probably wouldn't have cut it.
Europe's exchanges are now a big, fragmented mess, especially compared with the United States. LSE boss Xavier Rolet was going to leave after the merger, allowing Deutsche Boerse's Carsten Kengeter to run the show. It will be hard for Mr. Rolet to convince shareholders he is the one to champion a new solo strategy. Mr. Kengeter is in the middle of a share-dealing probe related to the merger. He needs that done and dusted as soon as possible. Meanwhile, Euronext has gone from picking up LSE's deal-related disposals to getting nothing.
This should be an opportunity for Intercontinental Exchange Inc. and CME Group Inc., which might be interested in buying either LSE or Deutsche Boerse. ICE, with net debt at only 2.1 times EBITDA, could afford to make a half-cash and shares approach at a tempting premium for LSE.
National sensitivities are as big an obstacle as ever to exchange mergers.
An ICE-LSE combination could in theory be presented as a great transatlantic alliance that fits with Theresa May's post-Brexit narrative. Perhaps by offering a generous price, gaining shareholder support and securing management harmony, the United States could win over some doubters. Right now, that feels as if it's a very long shot indeed.