The London Stock Exchange (LSE) has agreed revised terms to pay €15 per share to increase its stake in LCH.Clearnet from 2.3% to a majority 57.8% holding in a EUR351m deal. Surprisingly the deal also involves Nasdaq OMX increasing its share in the clearinghouse from 3.7% to 5%, with its chief executive, Bob Greifeld, expected to join the LCH board, although the minority stake gives it few powers.
The original deal was announced in December, shortly before Christmas, when the LSE said it would pay EUR366m - about EUR100m below the original offer price - for a 60% stake. The revised terms announced today on 7 March will see LSE paying up to EUR328m in cash upon completion this year, and up to a further EUR23m in a deferred payment in 2017.
The LSE says it envisages EUR25 million in IT and other cost rationalisation savings from its takeover of LCH.Clearnet. The move is being driven by the need for central counterparties (CCPs) to clear previously over-the-counter (OTC) derivatives contracts, effectively forcing them ‘on exchange’ and increasing transparency regulations post-crash, which mean more responsibility and capital funding will be required by firms like LCH.Clearnet.
An earlier link-up between the LSE and clearer was scuppered by enhanced collateral rules for CCPs in Europe. As part of this latest arrangement the LSE will put an extra EUR185 million into a EUR320 million fund-raising effort in order to boost the capital available to LCH.Clearnet, allowing it to meet regulatory demands. The increased stake of Nasdaq OMX is also helpful in this regard, although how two such rival exchanges will get along under the same roof remains to be seen. It does, of course, mean that the LSE can justifiably say that it supportive of the open access model where clearing services are available to multiple exchanges, rather than just the parent group under a vertical silo-type arrangement. LCH.Clearnet is also pursuing growth in the US having just appointed David Weisbrod as its new US chief executive, so the increased stake of Nasdaq OMX may help him.
"Our partnership with LCH.Clearnet will be transformative,” said LSE chief executive officer (CEO), Xavier Rolet, in a statement. “Together with our customers, we will promote greater innovation, choice and competition in the risk management industry, especially in listed derivatives. This new-style open-access clearing model, will build upon the successes we have already had with our existing equity and fixed income trading partnerships, Turquoise and MTS."
Rolet goes on to say the combined group is expected to achieve cost savings of approximately EUR25 million "largely from efficiencies in IT" via shared data centres, outsourcing, procurement savings and other operating efficiencies such as property rationalisation. A good de-duplication programme, eliminating unnecessary double storage and software / resiliency systems should also lead to savings.
Commenting on the takeover, Ian Axe, CEO of LCH.Clearnet, said: “Having engineered a successful transformation of LCH.Clearnet into a ‘best in class’ international, customer-focused CCP, we can now move forward with a partner which supports our horizontal business model and growth ambitions, and shares our strategy of innovation and global reach. Together, we see significant revenue opportunities opening up as a result of both customer and regulatory demand for more efficient and more sophisticated tools to manage market risk.”