The combined group will bring together two highly efficient and complementary businesses, coupling the strengths of Borsa Italiana in Italian cash equities, derivatives, securitised derivatives, fixed income products and efficient post-trade services with those of the London Stock Exchange in UK and international equities. It will capture the attractive macro-economic and market growth dynamics of Italian equities and bring together the best of the Italian and UK marketplaces. The combined group will be:
* Europe’s leading equities business, with 48 per cent. of the FTSEurofirst 100 by market capitalisation and the most liquid order book by value and volume traded;
* Europe’s leading market for electronic trading of ETFs and securitised derivatives; and
* Europe’s leading fixed income market, through its interest in MTS.
Moreover, the combined group will operate:
* The most advanced trading platform of any exchange; and
* The most efficient post-trade services in Europe.
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. This merger is the most important step yet for Borsa Italiana and the London Stock Exchange in realising their shared vision to be the world’s capital market.
Under the terms of the offer, Borsa Italiana shareholders will be offered 4.90 London Stock Exchange Group plc ordinary shares (“New Shares”) for each existing Borsa Italiana ordinary share (the “Offer”). Based on the London Stock Exchange Group’s closing share price of 1,387p and using the exchange rate of £1=€1.4815 as of 19 June 2007 (the day prior to the statement issued by the London Stock Exchange that it was in discussions with Borsa Italiana), the Offer values Borsa Italiana at £1,103 million (€1,634 million) and represents a value of €100.7 per Borsa Italiana share. Based on the same closing price and exchange rate, the combined group would be worth £3,900 million (€5,777 million).
It is the intention of the parties to change the name of the combined group to reflect its international profile. Borsa Italiana and London Stock Exchange plc will remain separate legal and regulatory entities and will maintain their existing brands. The parties have held preliminary discussions with Consob and the FSA.
The structure will allow the exchanges’ distinct market identities and strong customer relationships to flourish while enabling customers to take advantage of the benefits arising from cross-market linkage and the greater scale, diversity and broader expertise of the combined group.
Notwithstanding the high levels of efficiency already achieved by the two companies, pre-tax cost synergies and other transaction-related cost savings comprising an equal split of IT and non-IT related savings are estimated to be £20 million (€29 million) annually, with the full run-rate being achieved in FY 2010.
Furthermore, given the highly complementary nature of the two businesses and the prospects for growth that underpin the transaction, approximately £20 million (€29 million) of annual revenue synergies are expected to be achieved in FY 2011. The combined group expects to derive revenue synergies from the following areas:
* Creating attractive cross-market access opportunities via the operation of both markets on TradElect, the London Stock Exchange’s world-leading trading platform, and enlarging the liquidity pool available to listed companies;
* Accelerating the development of the SME marketplace in Italy and other European markets;
* Linking the two equity derivatives product offerings, thereby creating a larger liquidity pool for existing and new products;
* Adding new bond products on to the MTS trading platform; and
* Expanding Borsa Italiana’s highly efficient clearing services to other European markets.
In addition, a number of other growth opportunities will be available to the combined group, arising from a wide offering of ETFs, securitised derivatives and data products, from the launch of UK and pan-European derivatives and from the extension of post-trade services.
The transaction is expected to be earnings neutral to positive in FY 2008 and earnings accretive by at least 10 per cent. in FY 2009.
The Board of London Stock Exchange Group plc believes it will have more than sufficient support from its shareholders for the merger.
London Stock Exchange Group plc 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 combined group will operate under a UK corporate governance structure with a unitary board comprising twelve directors. Seven of these will be nominated by the existing London Stock Exchange Group plc Board (including the Chairman and two executive directors of the London Stock Exchange Group). The Chairman and Chief Executive of Borsa Italiana and three directors who are prominent members of the Italian financial community will be proposed by the existing Borsa Italiana Board, and will sit on the Board of the combined group.
Angelo Tantazzi, currently Chairman of Borsa Italiana, will become Deputy Chairman of the combined group. Massimo Capuano will become Deputy Chief Executive of the combined group while remaining Chief Executive Officer of Borsa Italiana. Chris Gibson-Smith, currently Chairman of the London Stock Exchange Group, will be Chairman of the Board of the combined group, and Clara Furse, currently Chief Executive of the London Stock Exchange Group, will be Chief Executive of the combined group. Massimo Capuano will be responsible for the integration of the combined businesses.
The Board of Directors of Borsa Italiana will comprise approximately twelve directors. London Stock Exchange will designate two of the five executive directors and one of the seven non executive directors.
Current Trading
Borsa Italiana markets have experienced a strong start in 2007, reaching all-time highs for cash and derivatives turnover, with an increasing number of IPOs.
* In the first five months the Italian primary market was highly active, with 16 new listed companies, of which twelve were IPOs.
* Trading in shares reached an average of 307,300 trades per day and €6.5 billion (up 24 per cent. and 37 per cent. on the corresponding period for the previous year).
* New records were also set by ETFs (daily average of 5,000 and €109 million) and securitised derivatives (daily average of 22,000 and €375 million).
* Equity derivatives reached all-time highs, with a daily average of 158,400 standard contracts (up 19 per cent. on the corresponding period for 2006).
The London Stock Exchange has made a very good start to the new financial year with strong trading in all main business divisions in April and May.
* Primary markets remain very active with 26 Main Market new issues, including eight by international companies. New admissions on the Main Market in May raised £5.7 billion, the highest month since July 2006.
This activity has continued into June with Q1 on track to be the best first quarter for Main Market new issues since 2001.
* The start of the year in the secondary markets has been very strong with average trades per day on SETS at 499,358 in May, already above the forecast for FY 2008 made in January 2007 and up 33 per cent. on the same period last year. The launch of the London Stock Exchange’s new trading platform TradElect this week, together with the continuation of the structural shift in trading, should ensure further significant trading growth during the year.
* Demand for real time and trading data remains strong.
Commenting on the agreement, Angelo Tantazzi, Chairman of Borsa Italiana, said:
“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. 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.”
Chris Gibson-Smith, Chairman of the London Stock Exchange Group, said:
“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.”
Massimo Capuano, Chief Executive of Borsa Italiana, said:
“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 London Stock Exchange’s new 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.”
Clara Furse, Chief Executive of the London Stock Exchange Group, added:
“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.”
The Board of Directors of Borsa Italiana met on 21 and 22 June 2007 to consider the Offer received from the London Stock Exchange as well as other strategic alternatives and indicative proposals. Having carefully considered all relevant aspects of any potential transaction, including, but not restricted to, value, user and stakeholder interests, business and operating model, market pricing, strategic considerations, governance and regulatory matters, the Board of Directors unanimously recommends that shareholders accept the Offer and vote in favour of the proposed amendments to the bylaws of Borsa Italiana at the Extraordinary General Meeting to be convened to implement the merger. All the major shareholders of Borsa Italiana are represented on the Board of Borsa Italiana.
The Board of Directors of London Stock Exchange Group plc, which has received financial advice from Merrill Lynch International and Lehman Brothers, considers the terms of the Merger to be fair and reasonable. In giving their advice to the Board of Directors, both Merrill Lynch International and Lehman Brothers have relied upon the Board of Directors’ commercial assessments of the Merger. In addition, the Directors believe the merger to be in the best interests of the London Stock Exchange Group Shareholders as a whole, and accordingly, intend unanimously to recommend that the London Stock Exchange Group Shareholders vote in favour of the resolutions to be proposed at the London Stock Exchange Group’s Extraordinary General Meeting as they have each undertaken to do in respect of their own beneficial holdings amounting to 536,590 London Stock Exchange Group Shares representing 0.27 per cent. of the London Stock Exchange Group’s existing issued share capital.
