London Stock Exchange Group Plc (LSE) rallied the most in more than eight months after agreeing to buy a majority stake in LCH.Clearnet Group Ltd. for 463 million euros ($613 million) to expand its post-trade services.
Shares in the owner of Europe’s oldest independent bourse climbed 8.9 percent to 977.50 pence at 12:08 p.m. in London trading, the biggest increase since June 30, valuing the exchange at 2.65 billion pounds ($4.2 billion).
LCH.Clearnet shareholders will receive 19 euros a share in cash plus 1 euro a share from a special dividend for a stake of as much as 60 percent, LSE said in a statement today. The offer values the world’s biggest swaps clearinghouse at 813 million euros, according to the statement. LCH.Clearnet shareholders, which include banks and brokers that use its services, will retain ownership of at least 40 percent of the company.
“LSE’s proposal for a majority acquisition maintains a shareholding position for current users, which gives them a stake and a say, and should also ease any potential antitrust concerns,” said Stefan Goetz, head of the financial institutions group at Societe Generale’s investment bank, one of LSE’s advisers on the deal.
That arrangement could also support the combined business. “All of the major banks will remain shareholders post deal, which is likely to make them inclined to continue to provide LCH with business,” James Hamilton, an analyst at Numis Securities Ltd. in London, wrote in a report today.
Clearinghouses operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default. The businesses have become more attractive as regulators globally seek more central clearing of derivatives.
LSE had been in talks with the London-based clearinghouse for more than six months. LCH.Clearnet had also attracted interest from Nasdaq OMX Group Inc. (NDAQ) and NYSE Euronext, which planned to bid in partnership with Markit Group Ltd.
The deal promises to be transformational for LSE as well as the market-infrastructure industry, Goetz said. “LSE is diversifying further into post-trade services, the fastest- growing part of the value chain, and the scale advantages from the transaction will also provide cost synergies,” he said.
Exchange operators from New York to Frankfurt and Singapore have sought takeovers to augment equity businesses after regulation and automated trading eroded profit. Nasdaq OMX is the majority owner of International Derivatives Clearing Group LLC, which opened in January 2009 for interest-rate swap futures. Deutsche Boerse AG in Frankfurt owns Eurex Clearing.
NYSE Euronext, the operator of the New York Stock Exchange, last month agreed to buy 25 percent of London-based Fixnetix, a provider of trading services, for 17.5 million pounds. The deal came two weeks after its takeover by Deutsche Boerse AG was blocked by European regulators.
The U.S. Dodd-Frank Act mandates that most interest-rate, credit-default and other swaps be processed by central counterparties and traded on exchanges or similar systems, taking business from the Wall Street banks that pioneered the transactions. All over-the-counter trades will be reported to regulators, while dealers and their biggest clients will face higher capital requirements to access the market. In Europe, regulators are also mandating more clearing of OTC derivatives.
The stake purchase in LCH.Cleartnet “gives us access to global clearing opportunities,” LSE Chief Executive Officer Xavier Rolet said on a conference call today. “This empowers the group to offer new products to innovate and provide a more competitive environment for listed derivatives.”
LCH.Clearnet, whose SwapClear service began clearing interest-rate swaps traded between banks in 1999, has seen its market share in equities eroded by new entrants. Its biggest customers, such as NYSE Euronext (NYX) and the London Metal Exchange, are considering clearing their own trades and two chief executives have departed in less than six years.
LSE scrapped its bid for TMX Group Inc., owner of the Toronto Stock Exchange, in June after failing to win support from TMX shareholders. Analysts said at the time the failure made the U.K. exchange a takeover target for rivals such as Nasdaq OMX.
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