Square Mile’s hidden jewel
ONE of the best reasons for the London Stock Exchange to remain independent is that it is doing very nicely thank you. Revenues and profits are surging, the LSE grabbed 71pc of European public offerings last year and the dividend is on the up.
It is disappointing that departing chief executive Xavier Rolet feels the need to insist that there are ‘compelling’ reasons to back the Deutsche Boerse bid. Normally in bids the chief executive gets on with running the business and the chairman does the talking. It might have been better if Rolet, who could collect £14.5m for his options should there be a change of control, had held his silence.
As the March 22 deadline set by the Takeover Panel approaches LSE investors must be licking their lips at the prospect of a bidding war at a time of gloom in financial stocks.
As the leading exchange in the world’s largest financial centre, and one which embraced change, it comes as no surprise that suitors are queuing up as they have been since the millennium.
Deutsche Boerse was first out of the box but ICE (owner of the Big Board in New York) and the Hong Kong Exchanges and Clearing are lining up assaults.
The huge interest, at a time when Britain lives under the cloud of Brexit, tells a political story.
But the LSE also has a hidden jewel which is not widely recognised. What the would-be buyers most want is its majority stake in LCH. Clearnet which many would regard as the least glamorous side of the LSE. The act of clearing deals, the administration behind all transactions, has long been regarded as the routine part of market making.
The financial crisis changed that. A fundamental reform wrought by the ‘great panic’ was an end to over-thecounter dealings, tailor made derivative contracts for favoured clients. It is now a requirement that such trades be conducted across established platforms where they are transparent and properly monitored. A conse- quence of this is that the clearing houses that make sure buyers and sellers are properly matched and do the electronic paper work have become enormously busy with millions of transactions.
The volume of derivatives trading far exceeds that on cash markets. Clearing houses charge a commission both to the originator of the deal and the party on the other side – double bubble. It has become a rich seam of new income.
LCH.Clearnet is particularly valuable because of its location in Britain the world’s l argest foreign exchange market where £1.9trillion of transactions are conducted each day. The risks for would-be LSE buyers are nevertheless considerable. Banks could decide to clear through an alternative platform. Or competition authorities could decide that concentration of clearing in fewer hands could grant the surviving clearing house too much pricing power. The LSE and its investors should hold their nerve and see off the predators. What others want the City of London already has.
Pay time
ANNUAL report season is upon us and it is again time to start being shocked at pay swilling around boardrooms. Bob Dudley did a terrific job in stabilising BP post the 2010 explosion on the Deepwater Horizon rig in the Gulf of Mexico which almost swept the oil group into the sea. But his total pay of £8.3m, included bonuses, in a year when profits fells sharply (because of the slump in oil prices) and jobs were cut feels excessive.
Another potential pay time-bomb on the horizon comes from WPP. Sir Martin Sorrell has demonstrated his value once again in WPP’s 30th year with healthy increases in billings, revenues and profits which is never easy in fast changing media world.
If the past is any guide we can expect the mood to darken when the annual report is published in May and the latest addition to Sorrell’s wealth is disclosed.
He at least can claim that his contribution to the nation’s creative sector and the balance of payments makes him worth every penny.
Bill Winters, the chief executive of Standard Chartered, still has much to prove having inherited a leaking ship. Investors in the bank might be a little curious as to why he received a golden hello of £6m, in return for his stake in hedge fund Renshaw Bay, when his stake was sold for far less.
Easy come, easy go.
Elliott’s Midas touch
MAYBE it wasn’t such a bad thing after all when hedge fund Elliott Advisers marched into Dundee based Alliance Trust, inserted its own board member and dislodged Katherine Garrett- Cox from her roles first as chief executive of the group and latterly of the investment arm. The Wall Street Journal reports that the US parent, hedge fund Elliott Management, has just secured a $ 2.4bn pay- out on Argentinian bonds bought for 20 cents on the dollar 15 years ago. It follows an expensive legal battle costing Elliott £70m in legal fees.
But for a return of up to 15 times the original investment, who is counting?
Better than Dundee’s traditional fare of flax, cake and the Beano.