LSEs independence still imperilled despite acquisition

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News article by Laura Board of The Deal quoting Brian Taylor, Managing Director, BTA Consulting

When London Stock Exchange Group plc chief executive Xavier Rolet presented his planned C$3.2 billion ($3.25 billion) takeover of Toronto exchanges operator TMX Group Inc. last week, he promised a “true global exchanges powerhouse.” The 51-year-old Frenchman had broken with predecessor Clara Furse’s strategy of batting back predators and taken an active role in exchanges consolidation. But his deal was instantly eclipsed by the fusion of Deutsche Börse AG with NYSE Euronext. The German-American combo would be the exchanges leader in profit and revenue, with annual sales of about $5.4 billion compared with $1.6 billion at the Anglo-Canadian pairing.

And while Deutsche Börse-NYSE Euronext would be No. 1 in the lucrative derivatives business by a wide margin, LSE-TMX would remain overly dependent on cash equities, where competition from alternative trading platforms will worsen with Bats Global Markets Inc.’s planned takeover of pan-European trading platform Chi-X Europe Ltd. According to The Wall Street Journal, the two players have struck a deal valued at up to $360 million.

Nasdaq OMX Group Inc. and IntercontinentalExchange Inc. are in advanced talks about a possible partnership, Fox Business Network reported Thursday. And LSE seems as vulnerable as ever to a takeover bid.

The TMX acquisition is "a good strategic deal. You can see the synergies on the primary markets side and the scope for using up technological capacity," said Brian Taylor, managing director of BTA Consulting Ltd. "But the company would by no stretch of the imagination have the same potential as NYSE Euronext and Deutsche Börse, and it doesn't put the LSE in a strong position in the derivatives space."

The TMX takeover would generate modest synergies of £35 million ($56.5 million) by year two and incremental revenue of the same amount by year three, the companies said. More significantly, the merged entity would be the No. 1 listing destination for the booming energy and resources sector as well as the leader for emerging-markets initial public offerings. However, Canada may not approve the takeover under the Investment Canada Act. Skeptics point to Industry Minister Tony Clements’ November veto of BHP Billiton Ltd.’s $39 billion hostile bid for Potash Corp. and to negative comments from politicians in TMX’s home province of Ontario. With TMX’s operations spanning Ontario, Quebec, British Columbia and Calgary, Clements has said he will take advice from the provinces as he determines whether the deal is of “net benefit” to Canada.

Meanwhile, Ontario and Quebec governments hold veto power over the stock exchange merger. (Quebec’s role dates back to the 2008 merger of the Toronto and Montreal bourses.) The two large Middle Eastern investors on the LSE register may further complicate matters. Borse Dubai Ltd. owns more than 20%, while Qatar Investment Authority owns 15%. It is unclear how they view the merger, which requires clearance from a simple majority of LSE shareholders. Despite this uncertainty, LSE’s stock has risen 4.1% since Feb. 7 as expectations of third-party interest have offset doubts about the TMX deal. (TMX shares have edged up 1.8% in the period, widening the premium implicit in the British all-stock offer.)

"The LSE is a target all the time because of its status, its location in London and its fantastic primary markets. London is the undoubted center of the world in terms of capital raising, and that is the jewel in the crown that everyone wants," Taylor said.

Analysts at Oriel Securities Ltd. predict that Nasdaq OMX, which has a market value of $5 billion, might have a second run at LSE, having unsuccessfully bid in 2006 and 2007. However, they note that Rolet has resolved some of the technology issues that plagued the London company under predecessor Furse. On Monday LSE switched its U.K. cash markets to its new low-cost Millennium trading platform, which it will eventually roll out across the entire group.

Another potential LSE suitor is Hong Kong Exchanges and Clearing Ltd., whose HK$179.5 billion ($23 billion) market value far eclipses the £2.5 billion market cap of LSE. The Asian bourse said last week it will seek alliances. Acquiring LSE would provide a mammoth boost to Hong Kong’s IPO business, where it has been slowly luring emerging-market companies from London, their historic listing venue of choice.

But Nasdaq OMX and Chicago Board Options Exchange Inc. have also been mooted as targets of Hong Kong. Meanwhile, Singapore Exchange Ltd.’s attempted $8 billion takeover of Sydney-based ASX Ltd. may, if it proceeds, prompt Asian exchanges to look closer to home. “The LSE is definitely of interest, but it’s by no means the only target,” said Axel Pierron, senior vice president at financial services consultancy and research firm Celent Europe. “Consolidation has started on the two sides of the Atlantic because there is a lot of overlap between the two markets and the regulatory environment is similar.

It could be that it moves back to Asia.” Even if the LSE loses its independence, Rolet might take comfort if a NYSE Euronext-Deutsche Börse tie-up forces the merged company to divest some key operations that would present attractive opportunities for the LSE. For NYSE Euronext-Deutsche Börse, antitrust issues, rather than political concerns, appear to be the biggest obstacle, particularly in commodities, where the barrier to new entrants is high and where the merged entity would account for about 94% of European futures trading. “Merging NYSE Liffe and Deutsche Börse’s Eurex would create a quasimonopoly,” Pierron said. “The question is — will regulators look at the derivatives market on a regional basis — or will they look at it from a global perspective?”