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LSE cuts deal to sell Clearnet to Euronext

03 January 2017

Sale is subject to LSE's merger with Deutsche Borse going ahead

Read more: clearing LSE Deutsche Borse Clearnet

London Stock Exchange (LSE) has agreed a €510m ($531m) cash deal with Euronext to offload Clearnet, its French clearing arm, although the sale rests on the LSE’s mega-merger with Germany's Deutsche Boerse going ahead.

Both Euronext and the LSE entered into negotiations over the sale of Paris-headquartered Clearnet before Christmas and details of Euronext's bid were revealed on Tuesday.

A period of consultation is now underway at the LSE and the group's officials have granted exclusivity to Euronext, ruling out rival bids from the likes of Nasdaq or CME.

The LSE’s move to offload the Clearnet, which as a central counterparty (CCP) clearing derivatives and other securities, is key to its $25bn tie-up with Deutsche Boerse.

The pair of exchanges said in late September they are prepared to sell Clearnet to allay competition concerns linked to their merger after the European Commission cited a reduction of competition in clearing as a risk when referring the proposed deal to an in-depth probe.

However, there are still doubts as to whether the deal will go ahead.

"We believe a sale to [of Clearnet] Euronext might go some way to appeasing the European Commission's many concerns, but we remain mindful of the many challenges that still need to be overcome for it to complete (competition authorities, regulatory concerns, national pride) and the long list of failed M&A deals within this sector," said Numis analyst Jonathan Goslin in a note to clients on Tuesday.

Clearnet generated net profit of €36m in 2015 and is of a handful of clearing houses owned by the LSE.

Clearing services for cash and repo transactions across French, Italian and Spanish Government bond markets contribute over a third of revenues last year.   Listed derivatives and commodities counted for 20%.

Euronext expects to achieve cost savings of €13m a year by 2020 and the acquisition is expected to be double-digit accretive to Euronext’s earnings from the first full year post completion.

The business, which operates exchanges in Paris, Portugal, Brussels and the Netherlands, was spun off from the NYSE Euronext group in 2014 following the acquisition of NYSE Euronext by the IntercontinentalExchange.

In 2013, Euronext signed a deal with LCH.Clearnet for the CCP to provide derivatives clearing for the exchange. This deal expires in 2018 giving Euronext the option to explore a new clearing relationship.

Last year, it acquired a 20% stake in equities clearinghouse EuroCCP.

Should the deal complete it will give Euronext ownership of a derivatives CCP, a key strategic advantage for the exchange as it seeks to expand its product base and grow a fixed income derivatives market.

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