LCH recently reported healthy 2011 results with net revenues up 16% to €387.2 million (2010: €335.0 million). LCH launched the much awaited ForexClear service at the end of 2011. LCH offers the service on nine currency pairs for interbank trades in currency options.
- Strongly positions Enlarged Group for long-term, leading role in global market infrastructure, in partnership with customers
- Combines LCH.Clearnet’s open, horizontal model with LSEG’s proven track record of customer partnerships and reinforces LCH.Clearnet’s stakeholder governance model
- Reinforces LSEG’s diversification strategy and enhances portfolio of leading global brands, products and services to drive growth
- Builds on the combined expertise of LCH.Clearnet and LSEG in owning and successfully developing regulated, systemically important businesses across multiple geographies
- Accepting LCH.Clearnet Shareholders will receive €20 per LCH.Clearnet Share acquired, comprising the Offer of €19 per LCH.Clearnet Share in cash plus €1 per LCH.Clearnet Share from the Special Dividend (payable by LCH.Clearnet in 5 years, subject to deductions)
- LCH.Clearnet total implied value of €813 million (£677 million), comprising total implied Offer value from LSEG of €772 million (£643 million) plus Special Dividend of €41 million (£34 million) (payable by LCH.Clearnet in 5 years, subject to deductions)
- LSEG to become majority owner of LCH.Clearnet, holding up to 60 per cent.; LCH.Clearnet Shareholders to retain at least 40 per cent.
- Maximum consideration to be paid by LSEG will be €463 million (£386 million), funded from existing resources and bank facilities
- Immediately earnings accretive for LSEG and return on invested capital is expected to exceed LSEG’s current cost of capital in the first year
- Undertakings received from LCH.Clearnet Shareholders to vote in favour of the LCH.Clearnet Resolution and to accept the Offer, representing 62.7 and up to 46.9 per cent. of LCH.Clearnet’s Issued Share Capital respectively
LCH.Clearnet Group Limited (“LCH.Clearnet”) and London Stock Exchange Group plc (“LSEG”) today announce that they have reached agreement on the terms of a recommended cash offer to be made by London Stock Exchange (C) Limited (“LSEC”), a wholly-owned subsidiary of LSEG, for LCH.Clearnet’s Issued Share Capital. On Completion, LSEG will become the majority owner of LCH.Clearnet, holding up to 60 per cent. of LCH.Clearnet’s Issued Share Capital.
Under the terms of the Transaction, accepting LCH.Clearnet Shareholders will receive €20 per LCH.Clearnet Share acquired, comprising cash consideration of €19 per LCH.Clearnet Share payable by LSEG under the Offer plus €1 per LCH.Clearnet Share from the Special Dividend payable by LCH.Clearnet (which may be reduced by the cost to LCH.Clearnet of any Relevant Claim(s)). The total implied value of LCH.Clearnet under the terms of the Transaction is €813 million (£677 million), comprising a total implied Offer value of €772 million (£643 million) and assuming €41 million (£34 million) paid under the Special Dividend. The maximum consideration to be paid by LSEG at Completion, assuming LSEG acquires 60 per cent. of LCH.Clearnet’s Issued Share Capital, will be €463 million (£386 million), which will be financed from existing cash resources and bank facilities.
Through this Transaction, LCH.Clearnet and LSEG will partner as a global leader in multi-asset, multi-venue clearing and risk management services, providing customers with an enhanced product and service offering.
Commenting on today’s announcement, Chris Gibson-Smith, Chairman of LSEG said:
“Strategically, structurally and financially this is a highly persuasive transaction. At a time when experience, stability and trust count for so much, we are delighted to be partnering with LCH.Clearnet as global leaders in market infrastructure. Together, we have secured the Enlarged Group’s long term role in the operation of international capital markets and we look forward to continuing to successfully deliver on our diversification strategy and to drive shareholder value.”
Jacques Aigrain, Chairman of LCH.Clearnet added: “We are pleased to partner with LSEG which has a shared philosophy of horizontal architecture and close partnership with customers. We look forward to working together to build on our respective strengths as we seek to deliver one of the premier global multi-asset, multi-venue clearing and risk management businesses.”
Xavier Rolet, Chief Executive Officer of LSEG said: “The Transaction will be transformative, delivering a strong, customer-focused clearing partnership between LSEG, LCH.Clearnet and our customers, the broker-dealer community. We will seek to promote greater innovation, choice and competition in the listed derivatives market through this new-style open-access clearing model, building on the successes we have already had with our existing equity and fixed income trading partnerships, Turquoise and MTS.”
Ian Axe, Chief Executive Officer of LCH.Clearnet added: “Transforming LCH.Clearnet into a best in class international CCP will be accelerated by the partnership’s enhanced capabilities. We see significant revenue opportunities opening up as a result of both customer and regulatory demand for more efficient and more sophisticated tools to manage market risk.”
Background to and reasons for the Transaction
Regulatory change and customer demand are creating significant new opportunities for clearing and risk management services globally. The LCH.Clearnet Group enjoys a leading position as a multi-asset, multi-venue provider of clearing and risk management services and, together with the LSEG’s existing clearing operations, will ensure that the Enlarged Group is well positioned to take advantage of these opportunities.
Developing its post-trade capabilities, especially in clearing, is a key priority for the LSEG Group. This priority recognises the importance of providing customers with an efficient and attractive service offering across each stage of the trading value chain. The Transaction meets LSEG’s strategic objectives to continue to build upon its existing assets and to seek new opportunities, particularly in the post-trade arena, accelerating diversification and growth for the LSEG Group. The Transaction will enable the LSEG Group to develop its current product and service offering, broadening its international clearing capabilities and providing the LSEG Group with exciting new opportunities for innovation, including, for example, the opportunity to seek to develop a new listed fixed income derivatives business.
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LCH.Clearnet has already initiated a transformation plan to increase efficiency, de-duplicate technologies and further develop its sophisticated risk and collateral management capability. LSEG is supportive of this transformation plan and expects that its own successful experience of driving cost and other efficiencies will assist LCH.Clearnet in delivering its strategy.
Background to and reasons for LCH.Clearnet’s recommendation
On 28 May 2011, LCH.Clearnet confirmed that it had received various proposals from third parties indicating an interest in pursuing some form of business combination or other cooperation with LCH.Clearnet. LSEG’s subsequent proposal combined an attractive value proposition to LCH.Clearnet Shareholders with an overall strategy supporting LCH.Clearnet’s horizontal model and the ongoing involvement of stakeholders in the governance and operations of the LCH.Clearnet Group. Taking account of all proposals received, and their key terms, including price, certainty, governance, proportion of LCH.Clearnet Shares to be acquired and strategic rationale, the LSEG transaction is considered to be the proposal most likely to be in the best interests of LCH.Clearnet Shareholders and to promote the success of LCH.Clearnet.
The LCH.Clearnet Shares are not publicly listed and the Transaction presents an attractive opportunity for LCH.Clearnet Shareholders to realise, in cash, their investment in LCH.Clearnet in respect of the LCH.Clearnet Shares which they sell under the terms of the Transaction.
The Transaction supports LCH.Clearnet’s existing strategic objective of enhancing its position as a leading global provider of multi-asset, multi-venue clearing and risk management services. At the same time, the Transaction provides a stronger foundation on which to compete effectively in the market for both listed and OTC clearing services whilst preserving LCH.Clearnet’s horizontal model, balanced governance arrangements and institutionalised client participation. LSEG has committed to LCH.Clearnet’s continued adherence to the principles of an open access, horizontal multi-asset class and multi-venue clearing model and the terms of the Transaction ensure the ongoing involvement of key stakeholders in the governance and operations of the LCH.Clearnet Group.
Benefits of the Transaction
Through this Transaction, LSEG will acquire a majority stake in LCH.Clearnet to form a leading global partnership in multi-asset, multi-venue clearing and risk management services, building on both the LCH.Clearnet Group’s and the LSEG Group’s existing clearing and risk management services. Together, LCH.Clearnet and LSEG will also be better positioned to respond to the growing demand for multi-asset CCPs and the increased need for post-trade services.
Annual revenue synergies of up to €20 million (£17 million) are targeted by the end of year 3 and up to €40 million (£33 million) are targeted by the end of year 5. Total annualised cost savings from LCH.Clearnet’s strategy are expected to amount to €35.8 million (£29.8 million) by the end of 2012, of which €3.6 million (£3.0 million) has been delivered in 2011. One-off implementation costs with regard to LCH.Clearnet’s planned cost savings are estimated to be €41.4 million (£34.5 million). In addition, LCH.Clearnet and LSEG have identified incremental cost savings of €23 million (£19 million) per annum by the end of year 3 and €25 million (£21 million) by the end of year 5. One-off implementation costs with regard to these incremental cost savings are estimated to be €14 million (£12 million).
The Transaction is expected to be immediately earnings accretive for LSEG. 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 (detailed in section 15) and thereafter meets and then exceeds WACC as the Enlarged Group benefits from full synergies and growth in the Enlarged Group’s business.
This statement regarding earnings enhancement is not intended to be a profit forecast and should not be interpreted to mean that the earnings per LSEG Share for the current or future financial periods will necessarily be greater than those for the relevant preceding financial period.
Timetable and LCH.Clearnet Shareholder support
Completion is expected by the fourth quarter of 2012 and is subject to regulatory and other approvals, including anti-trust clearance. In addition, the Transaction is subject to approval by LSEG Shareholders, acceptance of the Offer in respect of a majority of LCH.Clearnet’s Issued Share Capital and LCH.Clearnet Shareholders approving the adoption of the New LCH.Clearnet Articles and the Special Dividend.
LCH.Clearnet and LSEG have received undertakings from LCH.Clearnet Shareholders to vote in favour of the LCH.Clearnet Resolution in respect of 62.7 per cent. of LCH.Clearnet’s Issued Share Capital and to accept, or procure the acceptance of, the Offer in respect of up to 46.9 per cent. of LCH.Clearnet’s Issued Share Capital. These undertakings will cease to apply in certain circumstances, as described in Appendix E.