A few years back, the FSA warned banks to be careful about their choice of code words in M&A deals:
Use appropriate code names to disguise the identities of relevant parties. This only works if the code names are sufficiently different from the names of the relevant parties so their real identities cannot be determined.
So what moniker do you think the London Stock Exchange used in Monday’s FTSE International transaction?
London Stock Exchange Group invites you to a conference call to discuss its acquisition of the outstanding 50% of Fox International at 07:30am this morning.
The call will be hosted by Xavier Rolet, CEO, who will give a brief overview of the acquisition followed by a Q&A session.
Fox International. Genius. Who would have guessed the target company if that document had been left lying around?
Anyway, Mr Rolet had better be prepared for this morning’s Q&A session. He’s splashing out an awful lot of cash for the 50 per cent of the index provider which the LSE does not already own.
(Disclosure: the seller is Pearson, the parent company of the Financial Times).
Rolet’s paying 50 times earnings before interest! Admittedly the price does fall once £10m of synergies are taken into account, plus an £11m royalty payment that falls away.
And yes, this is a fast growing business – between 20-30 per cent a year. But even so the price looks rich, say analysts.
Numis Securities:
The valuation of £900m means the LSE is paying a huge 96x historic net income of £9.4m. This equates to 22.5x EBITDA but there were significant (£22.6m) of royalties to JV owners. Assuming the deal goes through we would expect a huge gain to be recorded through the P&L for the valuation adjustment on the current LSE stake in FTSE. This is however pure accounting trickery.
Espírito Santo Investment Bank:
LSE has announced that it is to acquire the 50% of FTSE international that it does not already own. It will pay £450m in cash for the 50% stake. FTSE made an EBITDA of £40m in 2011 which is expected to grow 31% to March 2012 to £53m. On this basis LSE is paying 17x 2012 EBITDA falling to 14.5x 2013 EBITDA should FTSE continue to grow at the 22% CAGR of 2006-2010
BarCap:
Multiple of FY10 EBITDA equates to 22x but this falls to 16x projected FY11E. Assuming a similar level of growth for FY12, multiple for next year might be only ~13x. However, the separately listed MSCI index business is trading at ~11x historic EBITDA.
So why on earth is the LSE paying so much money for an index provider? Is it because of the looming free float consultation that could make it much more difficult for dodgy foreign mining companies and complex cash shells designed by billionaires to float on the LSE?
Apparently not.
Along with the continuation of FTSE’s current strategy and growth plans, the London Stock Exchange Group fully supports the current polices and operations concerning the calculation, management and governance of FTSE indices. This includes FTSE’s independent index committees and presiding Policy Group, comprising market practitioners’ and industry specialists. This independent market-led approach will remain core to FTSE’s index governance practices, maintaining a vital difference between FTSE and its peers. Additionally, there will be no change to FTSE’s internal structure including its leadership, with Mark Makepeace remaining as CEO of FTSE.
All of which makes the deal even more puzzling. We’re guessing the rationale must be something do with giving the LSE a brand name it can use more fully in the ETF and derivative markets. Whether that’s worth £450m is another question.
And here’s something else to ponder, how will the LSE now fund the acquisition of LCH Clearnet?
Here, via a sector watcher, comes the answer and a rather punchy verdict on the FTSE transaction.
The LSE has historic net assets of £1bn. But negative net tangibles. Net debt was £232m at March 2011. Headroom was £500m plus £150m of available cash so £650m of spending power. This uses £450m, but there is a new facility providing another £350m debt so I suspect the company still has around £500m of spending power. Which is lucky as they are in talks with the LCH to allegedly pay up to £1bn for that business. There are suggestions they would only buy 50% of the LCH business so perhaps could still do the LCH deal without resorting to equity.
* Conclusion It is well past midnight in the casino. The LSE is leveraging up to place some strategic bets. The pricing differential between what public markets value exchanges at and what management will pay tells you there is a difference of opinion. I would expect selling on this.
And there has been selling. At pixel time, shares in the LSE were 23p weaker at 796.5p.
Also pressuring the shares is Friday’s move by Standard & Poor’s to place the LSE on “credit watch” over concerns at the rating agency that the UK bourse is “materially exposed to unsecured credit risk to Italian banks”.
As for what Pearson plans to do with the sale proceeds, we’d rather not speculate thank you very much.
Update: 10:30am (London time)
If, like us, you can’t figure out why the LSE is paying so much for FTSE here’s David Lister, the head of information services at the bourse, to explain. Basically, the answer is ETF’s. In order to flog these products to the public you need a reputable brand name to slap on the front, else people might give these opaque instruments a wide berth.
(The following comes from this morning’s conference call)
We have listed 5 major areas of growth, though I know there will be others. Let me touch on these briefly
· Derivatives: FTSE is at the cutting edge of innovation with the buy-side – as assets under management shift across the world, we are well positioned to create derivatives and tradable contracts to allow these assets to be efficiently hedged. The opportunities could be very significant even if just one or two new, liquid contracts are successful
· Data Products: FTSE computes indices on a highly frequent basis, disseminating the live data to a wide audience – and we can build on that using our low latency network, data warehouse infrastructure and ticker plants. We can facilitate faster and a wider spread of market and index information, creating new products and new trading opportunities
· The third area is ETFs and structured products: the need for global ETFs and similar products traded both on and off exchange continues to grow. LSE and FTSE will work together using our reach into issuers, market makers and trading participants ·
· Index licencing and Fixed income are also good examples where we can cross sell each other’s products and access respective client relationships. · Commercial sensitivities prevent me from expanding more on these areas, and this is not an exhaustive list, but I’m in no doubt there are many significant opportunities for FTSE and LSE and its joint customer base.
Commercial sensitivities prevent me from expanding more on these areas, and this is not an exhaustive list, but I’m in no doubt there are many significant opportunities for FTSE and LSE and its joint customer base.
Related links:
The Bank of LSE – FT Alphaville
The LSE and the Cassa di Compensazione e Garanzia – FT Alphaville
The LSE’s call to action – FT Alphaville