World Economy

Fight Over Control of SLE Getting Nasty

Fight Over Control of  SLE Getting NastyFight Over Control of  SLE Getting Nasty

A fight for control of London Stock Exchange Group Plc could get bare-knuckled as potential buyers jockey for dominance in an industry that’s quickly consolidating.

After LSE said it was in merger talks with Germany’s Deutsche Boerse AG, the two largest exchange owners in the world, CME Group Inc. and Intercontinental Exchange Inc., or ICE, may step in with unsolicited offers, Bloomberg reported.

With four of the world’s top five exchanges in the mix, a deal has the potential to scramble the industry. A purchase would give CME a commanding presence in Europe after it struggled to succeed there on its own. If ICE prevails, the combined entity could put more than $10 billion in market cap between itself and CME. And an LSE-Deutsche Boerse merger would create a company big enough to challenge CME’s market-leading $32 billion valuation.

Such stakes could make for a heated bidding war, said Michael Wong, an analyst at Morningstar Inc. in Chicago. “I can see it being contentious,” Wong said. “Everyone has something to gain, and arguably they’ll be blocked from stronger competitive positioning if they’re not the acquirer of LSE.”

To the victors go the biggest equities exchange in Europe, a majority stake in the world’s largest clearinghouse for interest-rate swaps and a profitable index business. The losers, meanwhile, would be left to sweep up what’s left.

 Major Players

Fear of missing out is a big factor as the three trading venues circle the prize. LSE Chief Executive Officer Xavier Rolet said last year that the market would one day be dominated by four or five global players.

Whatever the outcome, Rolet, a banker who spent most of his career at Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. before joining LSE in 2009, insists that London remains one of the world’s go-to trading hubs.

The assets Rolet has amassed at LSE make a strong case for the UK capital. In addition to its role as the premier London equities market, LSE controls a majority of LCH.Clearnet Group LLC, which holds $282 trillion of cleared interest-rate swaps as of March 3.

The LCH stake is attractive to both ICE and Deutsche Boerse because it’s “something neither of these companies have,” said Paul Gulberg, an analyst at Portales Partners LLC in New York.

While both ICE and Deutsche Boerse offer futures trading, ICE currently has no ability to clear interest-rate swaps and Deutsche Boerse’s Eurex exchange could dramatically increase its rate swap clearing. The private derivatives make up the largest part of the $553 trillion over-the-counter market.

Also attractive to buyers is LSE’s FTSE Russell index, the benchmark for nearly $10 trillion in assets. The index added 45% to LSE’s information-services revenue after the 2014 acquisition of the Frank Russell Co.

“Information services is a very strong part, if not one of the strongest parts, of the LSE,” said Jonathan Goslin, an analyst at Numis Securities Ltd. in London. “It’s a high-quality business with a high level of recurring income and good visibility on where profits should trend.”

A flurry of deals has created the handful of titans overseeing much of the plumbing for global trading. Atlanta-based ICE, with exchanges and clearinghouses in the US, Canada, Singapore and London, shows how, in the age of electronic trading, geographic proximity is no longer required.