The market gives a warm reception to this morning’s confirmation of the terms of the London Stock Exchange’s (LSE) acquisition of the Russell indexing business, with the stock up 5.7% to £19.78. The acquisition is the latest in a string of deals overseen by chief executive officer (CEO) Xavier Rolet since his appointment in 2009.
The £1.6 billion cap's purchase, the largest in the exchange’s 213-year history, will be paid for by cash, funded by a £942 million rights issue and additional debt. It represents a significant move into the US market for the LSE. Ahead of the deal, analysts were poised to revise up their forecasts dependent on the purchase terms and it was generally thought there would be little overlap between the two companies’ index businesses.
Numis Securities, which has its recommendation under review following this morning’s events, says: ‘Russell is expected to be earnings accretive in the first full year on an aggregate basis, with Russell's index business accretive from year two on a standalone basis.’
The addition of the Russell operations to the LSE’s FTSE International operations will further improve the quality of the exchange’s earnings, and is the latest in a series of acquisitions since 2009, including 2011’s purchase from Pearson (PSON) of the outstanding 50% share of FTSE it did not own at the time. Last year the group acquired a majority stake in clearing house LCH.Clearnet.
Short term the resilient markets bode well for continuing strength in secondary and primary activity. Comments Numis: ‘Markets are still taking IPOs and the regulatory environment continues to favour clearing. Most of the negative impact from lower treasury revenues has now impacted the P&L and the cost synergies are flowing. Consequentiality, we believe the LSE is well positioned for this year and beyond.’
The broker also sees potential for a renewed drive for exchange consolidation: ‘We continue to believe there will be global consolidation of exchanges and we expect the LSE to take part in this.’
