25 May 2011

FN: LSE's solution may lie south

If LSE is not being left stranded in the current round of exchange consolidation, it needs a Plan B. A merger with Nasdaq OMX looks the best option. The chances of the TMX deal surviving in its current form look slim. TMX has rejected a rival offer from Canadian consortium Maple, but Maple could find ways to address TMX's concerns over leverage and competition, or it could go hostile. Meanwhile, LSE's offer still needs government and regulatory approval. Ontario's finance minister has called TMX a strategic asset. LSE shareholders appear cool on the merger, and the smaller TMX is already being offered chairmanship and 45% of the group.

But if the TMX deal falls through, the LSE will be in a strategic bind. Its share of domestic equities trading has slumped to around 50% from a virtual monopoly a few years ago. It needs to gain scale and cut costs, particularly if a planned merger between rivals Deutsche Börse and NYSE Euronext gets regulatory approval. The Deutsche Börse/NYSE tie-up might yield some regulatory-related asset sales, the crown jewel being derivatives business, Liffe. The LSE could hold out for a takeover bid; the Singapore Exchange was rebuffed from acquiring Australia's stock exchange in April. But there is no guarantee either will materialise. LSE's £2.4bn market capitalisation puts large deals out of reach, while its low valuation multiple would make any emerging-market deal highly dilutive.

A merger with similarly-sized Nasdaq, however, could make sense. The US exchange has attempted a LSE takeover before, and was forced to abandon its own bid for NYSE Euronext last week. True, it has less to offer LSE in terms of expanding into derivatives or clearing services, but both groups have significant cash equities businesses, potentially allowing synergies nearer 15% of LSE's sales, versus around 10% for the TMX tie-up.

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