The London Stock Exchange, which over the past three years has seen off overtures from OMX, Deutsche Börse and Nasdaq, has joined the consolidation of the global exchange industry with a GBP1.1bn merger with Italy's Borsa Italiana to create what they say will be the leading diversified exchange group in Europe.

The boards of Borsa Italiana and London Stock Exchange Group have announced agreement on the terms of a recommended offer to the Italian exchange's shareholders in a deal that they say will provide significant benefits for both customers and shareholders.

The combined business will be the leading European exchange in the listing and trading of equities, with 48 per cent of the FTSEurofirst 100 by market capitalisation and the most liquid order book by value and volume traded, and in the electronic trading of ETFs, securitised derivatives and fixed income products, through its interest in MTS.

The merger, the parties say, will offer the most advanced trading platform of any exchange and the most efficient post-trade services in Europe, bringing together the strengths of Borsa Italiana in Italian cash equities, derivatives, securitised derivatives, fixed income products and post-trade services with those of the London Stock Exchange in UK and international equities.

'Borsa Italiana and London Stock Exchange are contributing to the creation of the European financial marketplace, open to new participants and aimed at reaching a global dimension,' says Angelo Tantazzi, chairman of Borsa Italiana. 'We believe this combination is a real growth opportunity for offering new services to issuers, intermediaries and investors, benefiting from the sharing of competencies upon which both the exchanges have built their own success.'

His counterpart in London, Chris Gibson-Smith, says: 'We share with Borsa Italiana a vision for how exchanges can support the creation of a more efficient European marketplace and a more diversified business: allowing distinct market centres to flourish within a corporate structure, using common technology and sharing market expertise. As a result, this is our most important step yet in creating the world's capital market.'

Tantazzi will become deputy chairman of the combined group and Massimo Capuano will become deputy chief executive while remaining chief executive of Borsa Italiana and taking responsibility for the integration of the businesses. Gibson-Smith London Stock Exchange chief executive Clara Furse will keep the same positions in the combined group.

The merger of Borsa Italiana and the London Stock Exchange will diversify the product and customer bases of the two exchanges. It will create cross-access opportunities and enlarge the liquidity pool available to listed companies thereby reducing their cost of capital. Together, they will leverage their highly compatible and broad range of skills to contribute to the growth of their marketplaces.

Under the terms of the offer, Borsa Italiana shareholders will be offered 4.90 ordinary shares in the London Stock Exchange Group for each existing Borsa Italiana ordinary share. Based on the group's closing share price of GBP13.87 on June 19, the day before the London exchange admitted it was in merger talks, the offer values Borsa Italiana at GBP1,103m or EUR100.7 per Borsa Italiana share, setting a value for the combined group of GBP3.9bn (EUR5.8bn).

The combined group will have a new name to reflect its international profile, but Borsa Italiana and the London Stock Exchange will remain separate legal and regulatory entities and will maintain their existing brands. The parties have held preliminary discussions with their respective regulators, Consob and the Financial Services Authority. The parties say this structure will preserve each exchange's distinct identity and customer relationships, while allowing customers to benefit from cross-market linkage and the greater scale, diversity and broader expertise of the combined group.

The two companies expect to achieve pre-tax cost synergies and other savings split equally between IT and non-IT factors of GBP20m annually from 2010, as well as about the same amount of annual revenue synergies from 2011. These synergies stem from the operation of both markets on TradElect, the London Stock Exchange's trading platform, accelerating the development of the SME marketplace in Italy and other European markets, linking the two equity derivatives product offerings, adding new bond products to the MTS trading platform, and expanding Borsa Italiana's clearing services to other European markets.

Together the exchanges will offer extensive coverage of the European markets with 48 per cent of the FTSEurofirst 100 index by market capitalisation and leadership in terms of average daily value traded and number of order book trades with EUR18bn and 764,000 per day respectively from January to May.

The combined group will also offer Europe's leading ETF and securitised derivatives trading platform, well positioned to build upon Borsa Italiana's lead in this area, while using the same  trading platform will create the largest liquidity pool in Europe for order book trading and facilitate greater cross-border access.

Following Borsa Italiana's recent exercise of its call option to acquire full control of MBE Holdings, the combined group will control MTS, the leading market in Europe for the electronic trading of fixed income securities. Coverage is across a broad range of money market and fixed income securities to the inter-dealer and rapidly evolving institutional investor customer segments.

The merger will combine Borsa Italiana and MTS with the London Stock Exchange's existing bond listing business and create the opportunity to extend its offering into new markets and products such as the rapidly expanding European corporate bond markets, other new international markets, and UK fixed income products.

London Stock Exchange Group will be the holding company of the combined group and, in addition to its listing in London, intends to seek a listing on Borsa Italiana. The group will operate under a UK corporate governance structure with a unitary board comprising 12 directors, seven nominated by the existing London Stock Exchange Group board, including the chairman and two executive directors. The chairman and chief executive of Borsa Italiana and three prominent members of the Italian financial community will be proposed by the existing Borsa Italiana board to become directors of the combined group.

Says Capuano: 'Borsa Italiana and London Stock Exchange are merging to create the leading market in Europe for listed securities and trading, with an innovative business model that leverages the strengths of the financial marketplaces in Italy and the UK. The new London trading platform, coupled with Borsa Italiana's efficiency in post trading, will foster growth opportunities for all stakeholders from the pooling of liquidity and product innovation.'

Furse adds: 'This merger is all about accelerating our growth through the provision of more and better products and services to our increasingly international customer base. Borsa Italiana's highly efficient businesses and expertise complement those of the London Stock Exchange extremely well. The combined group will have within it the capabilities and the additional scale, efficiency and diversity to provide what our markets want, thereby creating significant value for shareholders.'


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