M4 BARRON’S September 28, 2020
EUROPEAN TRADER
W
hat’s a little government
meddling, if that is the
price to pay to secure a $27
billion deal? The London
Stock Exchange has sacrificed a few
hundred million dollars because it wants
approval for its acquisition of financial-
data giant Refinitiv.
The British bourse operator has en-
tered into exclusive talks to sell its unit
Borsa Italiana, Italy’s markets operator,
to French rival Euronext (ticker:
ENX.France). The LSE (LSE.UK) has
rejected higher bidders to appease
Rome’s preference for that buyer. The
upside for the British group is that the
sale may unlock the Refinitiv deal.
According to media reports, Euronext
had the lowest offer on the table, com-
pared with those of German group
Deutsche Boerse (DB1.Germany) and
SIX, the Swiss Exchange operator.
The LSE will now have to explain to
its shareholders that the Italian govern-
ment favored Euronext as the next parent
of the country’s stock exchange. Euronext
is ready to make some room, both on the
shareholders’ registry and on the board,
for Cassa Depositi e Prestiti, the Italian
state-owned investor.
It would be easy to blame government
meddling for the apparent loss inflicted
on LSE shareholders. Borsa Italiana
might be sold to the French group for
some 3.5 billion euros ($4.1 billion), which
would be less than rival offers. LSE
bought the unit for €1.6 billion in 2007.
But look beyond the numbers, and
Italy may have done the LSE and its
shareholders a favor. LSE shares rose 1%,
and Euronext’s jumped 4%, the day they
announced they had entered exclusive
negotiations. LSE’s stock is up about 12%
this year, to 8,712 pence ($111.83), while
Euronext’s has gained 37% to €99.
The main reason is that the sale of
Borsa Italiana, which includes the com-
pany’s valuable MTS bond-trading plat-
form, will help LSE win approval from
the European Commission for its acquisi-
tion of Refinitiv from its current owners,
investment-management firm Black-
stone Group (BX) and Thomson Reu-
ters (TRI).
The EU’s competition watchdog said
in June it was launching an investigation
into the deal, on concerns that it might
lead to too much market power in the
trading of government securities if MTS
merged with Tradeweb, Refintiv’s bond-
trading platform. The probe is expected
to be over by mid-December. The sale of
Borsa Italiana would help the LSE’s case.
The LSE was right to look beyond
simple financial arithmetic for another
reason. Exchanges have grown in size
and power in the past 20 years. They are
no longer branches of the state, and are
listed companies on financial markets,
where they prosper.
The LSE’s market capitalization, at
more than 30 billion pounds sterling
($38.2 billion), dwarfs that of Euronext’s
€7 billion. Both are highly valued,
and both have seen their share prices dou-
ble in the past two years. Euronext also
operates exchanges in the Netherlands,
Belgium, Portugal, Ireland, and Norway.
However independent and global they
may be, those large bourse operators live
in close proximity to regulatory authori-
ties and, ultimately, governments. And
governments’ intentions or preferences,
even when they take the form of hard-to-
ignore pressure, are just other market
signals that global players have to recon-
cile with their own strategies.
Even though it may look like it is sell-
ing a valuable asset at a discounted price,
LSE can show its investors that without
it, it might have to give up the Refinitiv
acquisition—which is seen as crucial to
its long-term strategy. Euronext can note
to shareholders that it is paying a reason-
able price, compared with what others
were ready to pay.B
By Pierre Briançon
EMERGING MARKETS
Look Past China for Next
WaveofHotTechStocks
E
merging-market tech stocks,
concentrated in China, have held
up better than their U.S. counter-
parts in the market correction.
The Emerging Markets Internet &
Ecommerce exchange-traded fund
(ticker: EMQQ) has fallen 9% since Sept.
1, compared to 13% for the iShares U.S.
Technology ETF (IYW). Year to date,
the emerging market ETF is up 44%,
against 23% for the U.S. tech basket.
That’s giving emerging market inves-
tors something to brag about after years
of underperformance, but also got them
looking beyond the high-flying Chinese
internet for future returns. “We’ve been
trying to maintain some more balance,
not go all-in on the Chinese tech names,”
says Brian Bandsma, emerging market
equities portfolio manager at Vontobel
Quality Growth.
Twin Chinese giants Alibaba Group
Holding (BABA) and Tencent Holdings
(700.Hong Kong) still look to be on solid
ground, despite year-to-date gains of 26%
and 34%, respectively. They remain cheap
relative to U.S. peers. E-commerce king
Alibaba trades at about 24 times trailing
earnings, compared with more than 80
for Amazon.com (AMZN). “With a mar-
ketplace four times larger than the U.S.,
that’s a pretty compelling case,” says Al-
bert Brenner, director of asset allocation
strategy at People’s United Advisors.
The dominant Chinese players also
have more room to grow, argues Dara
White, global head of emerging markets
equity at Columbia Threadneedle Invest-
ments. Tencent, for instance, hits users of
its Moments social-media platform with
just four ads a day, compared with 25 for
U.S. counterpart Facebook (FB)—giving
it lots of runway to milk more revenue.
But second-tier Chinese tech stocks like
e-commerce rivals JD.com (JD) and Pin-
duoduo (PDD) and food-delivery cham-
pion Meituan Dianping (3690.Hong
Kong) have all doubled this year, entering
nosebleed territory that is pushing inves-
tors into alternatives. Columbia’s White
has his biggest country overweight in
Brazil, where he is focused on a newer
wave of innovators such as e-commerce
platform MercadoLibre (MELI), pay-
ments providers PagSeguro Digital
(PAGS) and StoneCo (STNE), and Mag-
azine Luiza (MGLU3.Brazil), a tradi-
tional retailer rapidly shifting online.
“You’re not buying Brazil, you’re buying
these excellent companies that weren’t
even listed a few years ago,” White says.
Vontobel’s Bandsma favors Indian IT
outsourcers like Tata Consultancy Ser-
vices (TCS.India) and HCL Technolo-
gies (HCLT.India). He’s also dipping into
some beaten-down Old Economy stal-
warts in Latin America, like Mexican
drinks provider Fomento Economico
Mexicano (FMX), Walmart de Mexico
(Walmex.Mexico), and Brazilian brewer
Ambev (ABEV). In June, Barron’s
pointed out that a number of these com-
panies were poised to keep climbing.
Notably absent from the conversation
is anxiety over U.S.-China trade tensions,
which drove Chinese shares last year.
Washington’s fitful moves against partic-
ular companies won’t stop China from
reaping its share of the approaching
booms in 5G telephony and cloud com-
puting, says Mehdi Hosseini, senior eq-
uity analyst at Susquehanna Interna-
tional Group. “You’re definitely seeing a
rebound in Asian 5G investment, and
cloud should come back by spring of next
year,” he says.
Blockades of key technologies like
semiconductors might delay, but not re-
verse, China’s technological ascendancy,
People’s United’s Brenner thinks. “We
can hurt the Chinese economy, but not so
much as to change the prospective land-
scape for investors,” he says.
Whether some of the hot stocks are
worth their current prices is another
question.B
By Craig Mellow
London Stock Exchange
Eyes Big Refinitiv Deal