From the FT's Lex blog
Phew. To say that London Stock Exchange chief executive Xavier Rolet needs to succeed in his wooing of LCH Clearnet verges on understatement -- especially given the failure to cement a proposed £4.3-billion merger with Canadian exchange group TMX last summer.
So news that the board at Europe’s largest user-owned clearing house is backing his proposed deal must have prompted big sighs of relief at Paternoster Square.
Taking control of LCH would help hugely in the repositioning of the LSE, away from traditional but vulnerable areas (such as cash equities) and towards businesses with better growth prospects. LCH, whose crown jewel is its SwapClear business, would deliver much more exposure to post-trade services generally, and to derivatives in particular.
Both should benefit from the determination of regulators in the U.S. and Europe to ensure that most swaps are cleared centrally. A controlling stake in a clearing business would also allow the LSE to match up better to a merged Deutsche Borse/NYSE Euronext behemoth, (assuming that antitrust regulators ultimately give that deal the nod, possibly with conditions attached).
For all this, the LSE is paying a hefty price. Its €21-a-share offer for 51 per cent of LCH values the clearer at over £870-million. That compares with LCH’s last reported profits (for 2010) of £32.3-million pre-tax. And even so, the deal is not home and dry.
LCH Clearnet’s 98 shareholders are a motley crew -- ranging from banks to exchanges -- and have not always spoken with one voice in the past. A 75 per cent approval level is essential. Perhaps more seriously, assuming it does win its prize, the LSE will have to manage an ongoing relationship with LCH users who will retain a powerful 49 per cent stake in the clearing business.
Any deal on clearing fee caps, for example, would eat into the LSE’s own returns. That said, co-ownership is a model Mr. Rolet has successfully used before, notably when the LSE bought the Turquoise trading platform. And even a potentially feisty marriage would probably be better than being stranded at the altar.
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