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David Schwimmer, chief executive of the London Stock Exchange Group, could hardly have written a better scenario.
The acquisition of Refintiv, the financial and trading data group that includes the Eikon terminals and a $ 27 billion stake in the $ 27 billion Tradeweb bond trading platform, has attracted almost enthusiastic support. from the investors. Since the Financial Times revealed for the first time that the LSE was getting close to the deal a week ago, the shares of this 300-plus-year exchange have jumped 24%.
"The market has voted with its checkbooks," said Andy Nybo of Burton-Taylor International Consulting, a division of TP ICAP.
Once the regulators in Brussels have canceled the planned LSE merger with Deutsche Börse in 2017, it is expected that the Refinitiv operation will allow a company still better known for its UK stock market and for the LCH clearing house to become a major force in the global distribution of the market. The data.
"From the shareholders' point of view, it's the right badet for the right owner. This box is clearly ticked, "said Iacopo Dalu, an badyst at Janus Henderson, a LSE shareholder.
However, this almost euphoric reaction only exacerbated the pressure on Mr Schwimmer, who has led the LSE for just one year, and on the group's president, Don Robert, even more recent, to conclude the most important contract of his long story. Here are some of the main challenges.
Charge the case
The dramatic rebound on Refinitiv is not the first time the LSE has sought to diversify away from its historic equity trading and IPO market. Its largest and fastest-growing business is Information Services, which is comprised largely of Russell and FTSE International index providers, acquired under former CEO Xavier Rolet.
While Refinitiv's Eikon terminals, which are fiercely competing with Bloomberg for a place on the desks of traders and portfolio managers, will generate more recurring revenue, badysts have worried about weak growth in the business. Refinitiv's revenues decreased each year between 2012 and 2016, but have stabilized since then.
"Refinitiv's overall revenue growth is worrisome," KBW badysts said.
Schwimmer acknowledged that investing in Thomson Reuters was not a priority. [Eikon]But insisted that the attention was greater since a consortium led by Blackstone acquired Refinitiv as part of a $ 20 billion deal last year. .
The group will face the challenge of both boosting revenue growth in Refintiv's Eikon data group and increasing margins. This will come in part from the savings of 350 million pounds announced by the LSE.
If the LSE is struggling to make Eikon a more attractive proposition than Bloomberg, a significant stake in TradeWeb and full ownership of the FXAll FX trading platform goes beyond stock trading. JPMorgan badysts say that one of the major benefits of the deal for the LSE is "the diversification and expansion of its foreign exchange and fixed income trading activities."
Kyle Voigt, an badyst at KBW, said that, for the moment, the LSE management is only getting credit for making a decisive decision in favor of Refinitiv.
"It's a strategic agreement. You buy strategic badets. . . The industry has been consolidating for several years. The remaining badets have a scarcity value, "he said. But the execution must follow.
Antitrust obstacles
The LSE has not been slow in recognizing that "transactions on large market infrastructures are extremely complex" and may require "material solutions".
However, on the face of it, it is unlikely that the agreement will present as many regulatory hurdles as the planned merger between the LSE and Deutsche Börse, where Brussels' request to the LSE to sell its trading platform. Italian MTS bonds to meet the concerns of the competition bore the final blow.
Refinitiv's activities have fewer areas in common with the LSE. Schwimmer said the activities were "highly complementary but not overlapping". All concerns could instead be focused on the so-called network effects and the potential ability of the exchange to direct transaction volumes to its own clearing service.
Refinitiv holds a majority stake in Tradeweb, the largest over-the-counter (OTC) rate trading platform, while LSE holds more than 80% of LCH, which dominates the clearing of interest rate derivatives.
Contrary to the proposed deal with Deutsche Börse, the combination of the LSE and Refinitiv is also unlikely to be swept away by a political battle between governments that has characterized the cross-border abortive transactions of the sector over the past two decades.
Niki Beattie, founder of Market Structure Partners, said: "It is very difficult for trade to enter into agreements with other markets, either because of competition concerns or because of the protection of" perceived national badets ". .
Mr. Schwimmer echoed the view that it was difficult to attempt a mega international exchange agreement, while stating that the acquisition of Refinitiv was different. "Cross-border trade transactions are quite difficult. This can be for political or industrial reasons. This is not a cross border trading transaction. "
But as part of the Deutsche Börse deal, stock exchanges were also confident of convincing regulators to make only minimal concessions.
New leadership
With the obvious exception of the deal with Deutsche Börse, the London Stock Exchange quickly touted its record of successful integration of acquisitions. Most of these transactions, however, were conducted under the direction of Mr. Rolet and former President Donald Brydon.
Mr. Schwimmer is a Goldman Sachs M & A training banker and therefore understands the dangers of acquisitions. But he has little experience as general manager and does not digest a market of this magnitude.
"It will take a few years and a good execution to make it truly value-creating," said Mike Fox of Royal London Asset Management, one of LSE's 25 largest shareholders.
Jeffrey Sprecher, founder and CEO of Intercontinental Exchange, owner of the New York Stock Exchange, was quick to hire LSE's new management team. David Schwimmer and David Warren [the LSE’s chief financial officer] They are two people I have known for years and whom I respect a lot and who are great in what they do, "he told badysts during an appeal while the results of ICE were published .
Analysts at Exane BNP Paribas estimate only 20% the risk that ICE is seeking to disrupt the deal with its own offer on the LSE. But Mr. Sprecher – along with billionaire Mike Bloomberg – will be among those looking to make life harder for the new LSE leadership team.
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