At the risk of stating the obvious, a stock exchange is a place that facilities the buying and selling of shares. It makes its money primarily through listing fees and trade commissions. This was generally the case for the London Stock Exchange Group (LSE: LSE), until it confirmed at the weekend that it was in negotiations for a potential purchase of market data provider Refinitiv.
Despite a $27bn price tag, LSE shares ended the day about 15% higher on Monday – the largest one-day increase they have seen in more than a decade – as investors took the news with the most positive of attitudes.
Market data
Owned by Blackrock, Refinitiv is primarily a market data and trading platform company, known for its Eikon terminals, spun-off from Thomson Reuters last year in a deal that at the time valued the company at $20bn. If the acquisition by the LSE goes through, it would not simply represent a mild move into the market data realm, but in fact, instantly make it a major player.
While Bloomberg is by far the dominant name – its terminals on just about every desk of every major financial institution around the world – the Eikon platform still holds a 22% market share (Bloomberg holds a 33% market share).
The acquisition also comes following long-standing attempts by the company to diversify over the past few years. These were hindered notably when it saw a potential merger with German exchange Deutsche Börse scuppered by European regulators because of competition concerns. In this latest deal, these same issues may resurface.
Pros and cons
Monday’s share price rally is an obvious indicator of how the market is taking the news, but I think this may be a little bit too optimistic a little too soon. Such a large acquisition in this field is likely to bring about some objections by a number of competitors, as well as spurring a number of potential antitrust and regulatory problems.
What’s more, the LSE will be taking on Refinitiv’s considerable debts as part of the purchase. Given the exchange’s strong share performance in the past year, it would not be a surprise if the company tapped the market through a new share issue to fund the deal.
All that said, there are a lot of positives to take away. Its core business as a stock exchange has been coming under increasing pressure, both as technology and competition reduce margins for equity trading, and as worries surrounding Brexit have been keeping much of its future, and that of the financial industry as a whole, uncertain. In this environment, diversification is a boon.
In a broader sense, the company is also in a prime position to take advantage of combining the two companies with integration between its data, trading and clearing platforms perhaps meaning the total becomes more than the sum of its parts.
With a dividend yield below the 1% mark, and a current P/E of 47, LSE shares are not perhaps offering investors the most appealing opportunity at the moment. But if and when this acquisition becomes finalised, I think the share price itself may still have room to climb.
