The London Stock Exchange (LSE) has confirmed speculation that it is considering a takeover of Frank Russell, best known for its stock index operations. Such a deal would necessitate an equity raising given that the LSE already has a large net debt position as a result of buying European clearing house LCH.Clearnet in 2013. The news sends shares in the financial services group down 1.9% to £18.20.
Espirito Santo reckons the LSE is only interested in Frank Russell's index arm and not its asset management business. The bank reckons the index unit could be valued at $2.4 billion, based on 12 times rumoured $200 million pre-tax cash earnings. Frank Russell is presently owned by Northwestern Mutual Life Insurance.
The LSE's last reported net debt position was just under £1.2 billion as of 30 September 2013. The exchange says that if a transaction were to proceed, it would be part-funded through an equity raise. 'We should expect LSE to look at assets in its areas of operation as they become available but we should only expect the company to proceed if it can clearly demonstrate the deal is value creative,' says Espirito analyst Phil Dobbin.
A deal would represent the LSE's biggest move in the index market since buying the 50% it didn't already own in FTSE International, compiler of the benchmarket FTSE 100 index, back in 2011 for £450 million.
The Wall Street Journal says the LSE faces competition for Frank Russell from rival index heavyweight MSCI and Canadian Imperial Bank of Commerce. The potential corporate action comes at a time when other index providers are undertaking strategic moves. The WSJ notes that Barclays (BARC) may soon sell its fixed-income index operations, potentially attracting interest from the LSE or Markit which itself is preparing to float in the US this summer.