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Flying the flag

Just over two centuries ago the first regulated exchange was founded in London. The world is a very different place today and so too is the London Stock Exchange (LSE) Group. John Dunne looks at its strategy for global domination after a series of acquisitions.

This year has been marked by a flurry of M&A activity among bourses across the globe. With high stakes and in uncertain markets, the LSE has shown itself as an aggressive player in the battle for global capital markets supremacy. Somewhat interestingly, it is a Frenchman who is doing his utmost to fly the flag for the City of London as it fights to maintain its status as the world’s premier financial centre.

Xavier Rolet joined the LSE’s board in March 2009 and just two months later the experienced investment banker was promoted to CEO. The subsequent refocusing of the group’s global positioning began slowly at first. Most notably there was the protracted and ultimately doomed merger with Canada’s TMX Group. Having been announced in early 2011, it was finally scuppered by the shareholders of TMX this year. They refused to buy the spin that the deal would be a merger of equals. But, undaunted by such setbacks, Rolet, a veteran of several Paris-Dakar car rallies, has picked up the pace of acquisition in the last year.

Transformative deal

Announced in March 2012 and completed in May, the acquisition of LCH.Clearnet deal saw the LSE expand its brand in what Rolet described as a “landmark and transformative” deal. While he appears intent on diversifying LSE both territorially and in terms of service line, he appears determined to fiercely defend the LSE brand, which remains the critical asset.

The £557m takeover of LCH.Clearnet saw the exchange group pay €19-per-share in cash for the majority stake in the clearing house, which organises and processes payments after a trade. It is this ‘post trade’ business which the LSE is looking to corner with this deal. At the same time, it aims to acquire other bourses to extend its reach. And this has been the case for some time – back in 2007, LSE acquired the Italian bourse, Borsa Italiana, for £1.1bn.

Since the successful bid for LCH.Clearnet, potential European regulatory hurdles have surfaced, denting the LSE’s share price. LCH.Clearnet, Europe’s biggest clearing house, will have to double its regulatory capital. It would be required to add another €300m-€375m to the €307m it held at the end of last year, under the suggested new rules. In addition, Borsa Italiana will also see its profit dented under the regulations from the European Securities & Markets Authority (ESMA).

Almost 7% of LSE’s value was wiped off when the impact of the rule changes emerged in late September.

“Exchanges across the globe continue to seek opportunity to consolidate,” Keith Bowman, equities analyst at Hargreaves Lansdown, told Corporate Financier. “The LSE moved on LCH in order to increase product diversification, particularly in the post-trade sector. On the downside, and as with the banking industry, exchanges have come under increased regulator pressure to increase their capital cushions.”

World of opportunity

The LSE is casting its net wide for growth opportunities. In July, it signed an agreement with Singapore Exchange Limited to allow the largest and most actively traded stocks on each exchange to be traded on each other’s platforms. It effectively means that Singapore listed firms can trade during London time and vice versa. Under the agreement, LSE members will be able to trade the top-36 Singapore-listed companies on LSE’s newly-created International Board.

LSE press officer Jonny Blostone said that partnerships such as this exemplified the strategy Rolet is following with the aim of diversifying the LSE franchise and ensuring partnerships with financial centres, which are ostensibly rivals: “It has been our view for some time that in 20 years there will not be so many exchanges around the world. There will probably be four or five global exchange groups.” He emphasised that their approach to M&A was not scattergun:

“It is not just about M&A among bourses, but companies which provide services to the markets as well, including technology and post -trade services, such as MillenniumIT and LCH.Clearnet.”

The collapsed deal between the LSE and Canada’s TMX would have created the largest mining exchange platform worldwide, with a combined market value of $6.9bn. As a sign of how competitive deals for exchanges are, a day after the LSE/TMX plans were unveiled, Deutsche Börse and NYSE Euronext unveiled a proposed $9.53bn all-stock deal. This would have created one of the world’s largest derivatives exchanges – rivalling Chicago’s CME. But this deal also hit the buffers and since then much market speculation has centred on whether the CME would make a counteroffer for NYSE Euronext.

The following week SGX of Singapore and the ASX of Australia announced tweaks to a proposed $7.8bn cash-and-share merger agreement to make it more palatable to Australian regulators. The deal was originally announced in October, the revised structure provided for more Australian representation on the combined company’s board. Back in London, the 135-year-old London Metal Exchange was taken over by Hong Kong Exchanges & Clearing in a $2.2bn deal in July.

That ended almost a year’s speculation over its future. Offers had come in from CME and NYSE Euronext for the world’s largest nonferrous metals market. With China accounting for 42% of the world’s metal production, many analysts see the Hong Kong company’s takeover as a triumph. Whilst this frenetic activity is receiving a mixed reaction from investors, what is clear is that the same players are invariably involved in the bidding wars.

This bears out Rolet’s view that in time there will be only a few powerhouses running exchanges. Daniel Garrod, a Barclays financials analyst, pointed to LSE management changes – including making David Warren chief financial officer – that had “strengthened the executive team” and “freed up time for Xavier Rolet to concentrate on group strategy”.

And Nese Guner at Citi is positive about the strategy: “The LSE is our preferred European exchange stock as it offers: higher earnings growth potential than its peers, [particularly] post its Clearnet acquisition; a more diversified and less volume dependent business mix than its peers and the best positioning to benefit from the regulatory changes in the European market structure.”

What is clear is that next year is likely to see further M&A activity as the major players launch bold new bids to put them ahead of the pack. Under Rolet, the LSE is not only representing the interests of his business but the future of the City of London as one of the premier hubs for financial services. The LSE’s Blostone ebulliently told Corporate Financier: “We are confident that our strategy is taking us in the right direction.”

Deal £m
July 2012 Aquisition of 5% stake in Dehli stock exchange Undisclosed
May 2012 Sale of 49% stake in Tokyo AIM to its JV partner = Tokyo Stock Exchange Group Undisclosed
March 2012 Acquisition of LCH.Clearnet 557
December 2011 Acquisition of 50% stake in FTSE International 450
August 2011 Acquisition of FSA Transaction Reporting Service 15
April 2011 Sale of Italian software services firm, Servizio Titol 26

This article first appeared in Corporate Financier, magazine of the ICAEW Corporate Finance Faculty  in December 2012.