Market thrall

The tie-up between Borsa Italiana and the LSE could herald the opening up of a wealth of new investment opportunities, say Anthony Indaimo and Luca Bonetto


After much speculation Borsa Italiana (Borsa) and the London Stock Exchange (LSE) announced on 2 June 2007 that they were to merge in a proposed £1.1bn deal. The deal was approved at shareholder level in August and it is now expected to complete in October 2007, following regulatory approvals and the listing of the new shares. The intention is to create Europe’s leading diversified exchange group and to encourage future growth at European and international level.

The all-share deal will see Borsa shareholders receiving approximately 28 per cent of the enlarged group. Interestingly, Nasdaq’s stake of approximately 30 per cent in the LSE is now up for sale to part fund its $3.7bn (£1.84bn) cash and shares bid for Nordic Exchange OMX.

The key attractions of the merger include: diversifying the product and customer bases of the two exchanges; creating cross-access opportunities for issuers, intermediaries and investors; increasing the liquidity pool, thereby reducing trading costs and the cost of capital; accelerating growth for small and medium-sized enterprises (SMEs) both in Italy and in Europe; and diversification of and adding new bond products on to Borsa’s electronic government bond trading platform MTS.

Most importantly, the merger will also give the LSE access to technology that could reduce its costs, as Borsa is the cheapest platform in Europe for clearing costs and second only to NYSE Euronext in settlement charges.

More choices for Italian SMEs

Italy has the highest concentration of SMEs in Europe, many of which are high growth and international, often deriving more than 50 per cent of their revenue from outside Italy. However, for many Italian SMEs, access to capital to fund acquisitions or to further develop their product remains a challenge. The shortage of available finance for SMEs, with a particular emphasis on the early stage of SME creation, is recognised as one of the main factors that hinder business growth in Italy.

Simplified listing

It was against the background of limited access to growth capital that, in 2003, Borsa launched Mercato Expandi specifically designed for Italian SMEs. Expandi provides for a simple, fast and inexpensive listing. Although there are no working capital requirements, there are certain restrictions to admission to trading on Expandi, including a minimum market capitalisation of €1m (£689,100); at least 10 per cent of the company’s issued share capital must be available to the public; and the issuer must have positive financial results for the past two financial periods preceding admission.

A total of 26 companies were listed on Expandi in 2006 (up from 18 in 2005). As at June 2007, 30 companies in total had listed on Expandi.

In July 2007, in an attempt to mirror the success of the LSE’s secondary exchange AIM, Borsa launched the Mercato Alternative di Capitale (MAC) to provide a platform for shares in Italian SMEs to be traded by institutional investors.

Trading on MAC is expected to begin in September 2007. The aim is to facilitate access to risk capital and reinforce the financial structure of Italian SMEs. MAC will also try to bring companies closer to professional and institutional investors. Companies seeking to trade on MAC only have to produce one year’s worth of audited accounts and have freely transferable shares. In addition, and most importantly for companies and the advisers, a prospectus is not required since only professional investors have access to MAC. Borsa sees MAC as the domestic alternative to AIM.

AIM success

AIM is targeted at ambitious, entrepreneurial and growing international companies and has proved since its launch in 1995 that it is a credible alternative to the main market of the LSE. The figures speak for themselves. In 2006 462 companies joined AIM, 334 of which were IPOs and a total of £10bn was raised in new issues. As at June 2007, a total of 1,656 companies, including 319 international companies, were trading their shares on AIM.

Almost every institutional investor, such as UBS, Goldman Sachs, JPMorgan, the Royal Bank of Scotland and the like, now has some exposure to AIM: it has become one of the professional markets of choice in recent years.

Nominated advisers (nomads) and brokers play a key role. AIM is essentially a market based on reputation within the City and its quality control is outsourced to the nomad. The nomad’s confidence in the company’s business strategy and executive management team is crucial.

Investment difficulties

For many Italian SMEs, closing an investment by a private equity fund is often an arduous task, despite healthy revenues. In 2006 there were 292 private equity deals in Italy and a total of more than €3.7bn (£2.55bn) invested (with an average of €12.6m (£8.68m) per transaction) compared with £5bn invested by the 10 largest institutional investors on AIM in 2006. It is not surprising that Italian SMEs predominantly turn to existing shareholders or banks to fund their corporate financing needs. In addition to being an alternative source of capital, AIM may, therefore, be an interesting exit route for Italian private equity funds seeking to attract an international institutional investor base.

New entrants in 2007 to trading on AIM include Matica plc (an international supplier of card personalisation and card mailing systems) and fashion designer Mariella Burani’s holding company Burani Designer Holding NV. There are now seven Italian companies listed on AIM and following the merger it is expected that further companies will follow.

AIM has also in recent years been targeting overseas companies through a fast-track application process to enable companies that are already listed on certain overseas stock exchanges (NYSE Euronext, Nasdaq and Deutsche Börse) to apply to have their shares listed on AIM using a quick and simple application.
Following the merger, it will be interesting to see whether Borsa will be added to the list of qualifying overseas stock exchanges that benefit from the fast-track application process. A listing on Expandi (and, possibly, MAC) could, therefore, prove to be the natural stepping stone for progressing to AIM.

However, certain key issues remain to be successfully addressed by Italian companies wishing to list on AIM. The practical obstacles for Italian SMEs, managed historically as family businesses, still include being able to recruit a strong and credible international management team and adherence to standard market practice and corporate governance principles, as well as dealing with the presentation of financial information for listing.

Once listed on AIM, Italian SMEs will have to prepare financial information in accordance with International Financial Reporting Standards (IFRS) and it is not uncommon to find Italian SMEs ill-prepared to face the task of IFRS reconciliation and, generally, the presentation of financial information.

Expansion hopes

The LSE-Borsa merger may provide potential for AIM to be offered as a domestic product to Italian SMEs alongside Expandi and, once launched, MAC. In addition to providing more choices for Italian entrepreneurs and private equity funds looking to list their companies, the efficient trading and post-funding costs of Borsa may also encourage the retail market to invest more readily in Italian companies. Advisers look forward to seeing how LSE and Borsa will tackle integration and marketing of the two exchanges. These are interesting times for the Italian market.

Anthony Indaimo is chairman and Luca Bonetto is an associate at Withers