There is a significant probability that a bid will emerge for the London Stock Exchange Group as a standalone company as the UK exchange is in discussions to buy data provider Refinitiv.
Chris Turner, Berenberg
Chris Turner, analyst at German financial services group Berenberg, wrote in a report that the strong strategic positioning of the group’s core assets - clearing house LCH and index and data provider FTSE Russell - means there is a significant probability that a bid emerges for LSE as a standalone company.
“We also see a one-in-three chance that this transaction “flushes out” other parties with a longstanding interest in acquiring LSE,” he added.
Turner continued that the LSE has been the target of a bid approach once every two and a half years, on average, since it listed in 2000.
He said the £27bn ($33bn) price tag for Refinitiv suggests an attractive valuation; that the strategic logic is solid; anti-trust issues are low(ish) and the execution risk is average for the industry.
LSEG said in a statement that it had a strong strategic rationale for the deal as digital transformation means that financial markets infrastructure providers must operate globally across asset classes, with data management, analytics and distribution capabilities that can serve customers across asset classes and geographies.
“The Refinitiv Data Platform has over 150,000 data sources, and is a leading provider of real-time pricing, reference data, private and public company information and events, commodity, economic, quantitative and research data, Reuters News and over 10,000 other news sources,” added the UK exchange.
The statement continued that LSEG and Refinitiv would be the largest listed global financial markets infrastructure provider by revenue, with combined annual revenues of more than £6bn last year.
In addition, LSEG said annual run-rate cost synergies of more than £350m would be deliverable in the five years after completion and that the transaction would deliver strong adjusted earnings per share accretion in the first full year after completion.
Turner said in his report: “This proposed deal reflects the way that electronification of trading has blurred the boundaries between exchanges and information service companies. It would significantly broaden and deepen LSE’s data and analytics offering across asset classes, geographies and customers.”
Virginie O’Shea, research director at consultancy Aite Group, tweeted:
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Octavio Marenzi, chief executive of capital markets management consultancy Opimas, said in an email that the London Stock Exchange Group has already largely converted itself into a data business and generates more revenues from data, indices, and analytics than it does from its core exchange business.
“This deal is likely to receive very careful regulatory scrutiny since exchanges have been harshly criticised recently regarding the amount that they charge for data and the profit margins they enjoy,” added Marenzi.”
Turner said in his report that the size and complexity of the deal makes a detailed, phase two, competition review almost inevitable. Berenberg believes that European competition rules are generally supportive of consolidation in the information services space, so there are unlikely to be material issues.
Trading venues
“Bringing key over the counter trading and clearing venues under common ownership is likely to attract greater scrutiny,” added Turner. “We expect that any foreclosure concerns will be assuaged by LSE’s longstanding commitment to open-access in clearing.”
Octavio Marenzi, Opimas
Marenzi continued: “On the trading side, Refinitiv has a strong presence in foreign exchange trading, an area where the LSEG has been weak, so this also provides asset class diversification for the LSEG.”
The Refinitiv deal would give LSEG control of three of the largest over the counter trading platforms - Tradeweb, FXAll and Matching- which Turner said are complementary to LSEG’s strength in OTC clearing. LSEG said Refinitiv’s trading venues businesses have an average daily trading volume of more than $400bn in FX and more than S$500bn in fixed income.
Deutsche Börse had been in discussions with Refinitiv about potentially purchasing certain foreign exchange businesses. After the LSE confirmed its discussions with Refinitiv, the German exchange group said in a statement that it does not expect its discussions to be successful.
Theodor Weimer, chief executive of Deutsche Börse Group, said on the exchange’s results call last week that the Refinitiv negotiations were ongoing but he could not cannot comment further, especially on timing.
Turner said in a report on Deutsche Börse last week that although the first half of the year was reasonably solid for the German exchange, lower US interest rates and fourth quarter volume comparisons suggest the second half will be tougher.
“This makes it an opportune time for Deutsche Börse to supplement earnings growth through inorganic means, and is why the long gestation of an agreement to acquire FXAll is particularly disappointing,” added Turner.
