Battered London Stock Exchange holding out for Brexit breather
Bruised by the collapse of its merger with Deutsche Boerse and battered by the abrupt departure of its chief executive, the London Stock Exchange (LSE) may find Brexit buys it time get its house in order.
The turbulence at the top of the 300-year-old City of London institution has triggered another round of speculation that large US rivals such as ICE or CME could become predators.
While London is Europe’s biggest financial market, Britain is due to leave the European Union in just over a year’s time and it is far from clear what trading relations it will have with the bloc in terms of financial services.
“I see [a bid from a US rival] as doubtful as ICE especially, in my eyes, wants to see more substance on Brexit negotiations before pulling their chequebook out,” says a top-20 LSE shareholder, who declined to be named.
What is more, while the London exchange’s LCH division dominates the clearing of financial contracts in euros now, some EU policymakers insist the business should move within the currency bloc once Britain quits the EU.
“For anyone stepping in and thinking about acquiring the LSE, the big risk for them is Brexit,” says an analyst at an investment bank, who added that LSE shares looked expensive given the uncertain outlook.
“ICE and CME would be foolish not to look at LSE as this is one where you want to strike when the iron’s hot. But because of Brexit, it just seems that 22 times next year’s earnings in this environment is a risk,” the analyst says.
Before quitting last week after more then eight years, the chief executive Xavier Rolet turned the LSE into a diversified exchange group by expanding its activities in stock indexes and buying a controlling stake in LCH.
Under the former investment banker, the LSE’s share price increased fivefold and a successful merger with Deutsche Boerse would have added a significant futures business to its portfolio to catch up with US rivals.
But the deal to create Europe’s biggest stock exchange started to unravel after the Brexit vote as politicians bickered over whether the seat of power should be in London or Frankfurt. EU regulators killed the deal off in May.
In October, the LSE announced that Mr Rolet would step down at the end of 2018, but days later activist investor TCI Fund Management said the Frenchman was being forced out and it should be LSE chairman Donald Brydon going instead.
A month of messy public wrangling followed, exposing a deep rift between the chairman and the CEO and dragging in the Bank of England. Mr Rolet quit on Wednesday and TCI again called for Mr Brydon to go.
Coupled with the uncertainty over Brexit and the risk that any merger might run into anti-trust difficulties, the London exchange should have time to get back on its feet before any large rival swoops.
“We’ve still got a board, we’ve still got the executive team. They may launch a bid but the board is never going to recommend something unless it represents proper fundamental value,” said an adviser to the LSE.