The board of the London Stock Exchange (LSE) and the top brass at clearing house LCH.Clearnet have thrashed out the terms under which the clearer will become part of the LSE group.
The LSE is offering €19 per LCH.Clearnet share, plus LCH.Clearnet shareholders will be allowed to keep the recently announced special dividend of €1. The terms value LCH.Clearnet at €813m (£677m) with the special dividend thrown in.
The two parties have been in exclusive talks over a merger since September of last year. As a clearing house, LCH.Clearnet acts as a middle-man between trading firms, acting as a counter-party and reimbursing companies in the event of one side in a trade defaulting on the transaction.
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The merger announcement said the deal "combines LCH.Clearnet's open, horizontal model with LSEG's proven track record of customer partnerships and reinforces LCH.Clearnet's stakeholder governance model."
Undertakings from LCH.Clearnet shareholders to vote in favour of acceptance of the offer have been received from holders representing 46.9% of LCH.Clearnet's issued share capital.
The acquisition of the clearing house is a feather in the cap for Xavier Rolet, Chief Executive Officer of the LSE, and will take some of the sting out of the group's failure to merge with Canadian stock exchange operator TMX Group last year, a deal which was hijacked by Canadian institutions.
The move continues a trend among bourse operators to amalgamate, as they seek to offer a broader range of services; two of LCH.Clearnet's biggest exchange clients, NYSE Euronext and the London Metal Exchange (LME), are planning to introduce trade clearing facilities in the future. NYSE Euronext, which has a 9% stake in LCH.Clearnet, intends to stop using LCH.Clearnet in June 2013 for clearing futures trades, while the LME has a target of doing its own clearing within two years.
The decisions by NYSE Euronext and LME have made the negotiations over price more difficult than they might otherwise have been.
However, according to the merger announcement, the LSE reckons it could achieve annual revenue synergies of up to €20m (£17m) by the end of the third year of ownership of LCH.Clearnet, and up to €40m (£33m) by the end of year five.
Total annualised cost savings from LCH.Clearnet's strategy are expected to amount to €35.8m (£29.8m) by the end of 2012, of which €3.6m (£3.0m) has been delivered in 2011. One-off implementation costs with regard to LCH.Clearnet's planned cost savings are estimated to be €41.4m (£34.5m). In addition, LCH.Clearnet and the LSE have identified incremental cost savings of €23m (£19m) per annum by the end of year three and €25m (£21m) by the end of year five.
One-off implementation costs with regard to these incremental cost savings are estimated to be €14m (£12m).
The acquisition is expected to immediately boost earnings for the LSE. Return on invested capital is expected to exceed LSEG's weighted average cost of capital (WACC) in the first year, falling slightly due to the expected loss of NYSE Euronext's business in the second year and thereafter meets and then exceeds WACC as the enlarged group benefits from full synergies and growth in its business.
The merger is expected to complete by the fourth quarter of 2012.
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