(Bloomberg Opinion) -- The sale process for Italy’s stock exchange had looked like a stitch-up after the Italian government got in on the bidding as a partner to Euronext NV. But if state involvement helped the European bourse win the deal for Borsa Italiana, it certainly did not facilitate a bargain price.
Exchange assets like this don’t come up very often. So when current owner London Stock Exchange Group Plc put it up for sale there was inevitably competing interest. Deutsche Boerse AG, which would have had strong synergies, and Switzerland’s SIX Group, which has been a generous buyer in the past, took a look too. Euronext secured a window of exclusivity in talks with the support of Italian savings bank Cassa Depositi e Prestiti SpA.
Rome’s backing for Euronext may have made other bidders hesitant to pursue a deal too aggressively. Either way, there was evidently enough of an auction to get the price up. At 4.3 billion euros ($5 billion) for the equity, and an estimated 4.7 billion-euro enterprise value, the deal is more expensive than expected. Fresh details of Borsa Italiana’s financial performance show it’s more profitable than thought, but that only partly mitigates the high price.
Even taking the benefit of the projected cost savings up front, the immediate operating profit boost from buying Borsa Italiana looks likely to be less than 300 million euros. That would imply a sub-5% post-tax return on invested capital to begin with, falling short of an estimated 7% cost of capital. Euronext has also had to swallow some governance concessions in its Italian partnership. The Italian government now gets to appoint two members to the Amsterdam-based company’s 10-strong supervisory board — including the chairman. That is a high degree of influence for the 7% stake that CDP is taking.
The question is whether the price and governance concessions are worth it for ordinary shareholders. Euronext deserves the benefit of the doubt. True, it has paid a big premium here but it gets strategic options from owning this asset, which extends its reach in fixed-income as well as equities trading.
The stated synergies are equivalent to around 20% of Borsa Italiana’s cost base. They are almost certainly undercooked: Analysts at Jefferies point out that 30%-40% has been achieved in comparable M&A transactions. On that basis, and assuming some growth, the likely returns will be higher.
As for governance, the bottom line is that Euronext was just too small to bid on its own. It needed to pull together a consortium to do this transaction. Rome at least brought more certainty to the situation. But shareholders will want reassurance that this is more a Euronext takeover of Italy’s exchange, rather than an Italian grab for the broader group.
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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