The London Stock Exchange (LSE) has agreed to acquire the Refinitiv data and analytics business spun off last year from Thomson Reuters in a move that reflects the growing role of data in the stock market business and the financial sector as a whole.
After being thwarted last year in the latest of repeated efforts to merge with Deutsche Börse due to competition concerns, the LSE is now going a different route to diversify and expand its business.
The deal, valued at $27 billion including debt, would position the LSE group to take on Bloomberg and Standard & Poor’s in the field of financial data. It would also give the exchange the heft to compete with US rivals Intercontinental Exchange, owner of markets including the New York Stock Exchange, and the CME Group, operator of the Chicago futures and options exchanges.
Survival of the fittest
It is the next logical step for exchanges after fees for market data have become a profit center in their own rightOpens a new window , and part of the evolution of markets from clubby membership entities to public companies avidly looking to make money. But profit can be hard to come by amid fierce competition for trades and the steady erosion of public marketsOpens a new window by private equity investment.
The European Commission’s competition authority put the kibosh on the LSE-Deutsche Börse merger because it feared the combined business would dominate Europe and make smaller exchanges less competitive. A 2011 attempt to merge with the Toronto Stock ExchangeOpens a new window also failed, as did earlier combinationsOpens a new window with Sweden’s OMX, Australia’s Macquarie Bank and Nasdaq.
Although this transaction would be more highly leveraged than the Deutsche Börse deal, it is expected to encounter far less opposition from regulators, who are more likely to see the combination as fostering competition with other data providers.
Eikon terminal takes on Bloomberg
The LSE has already branched out into related activities with acquisitions such as the $2.7 billion purchase of index provider Frank Russell in 2014. Refinitiv currently supplies data for LSE’s index operations as indexes become a major business in their own right with the rapid growth of passive exchange-traded funds.
But this acquisition is of a completely different order. It includes the Eikon terminal, which has 40,000 users, and analytical software that catapults LSE into competition with Bloomberg, which dominates the market with 330,000 terminal users. Bloomberg has a 33% market share for financial data terminalsOpens a new window , compared with 22% for Refinitiv.
Thomson Reuters was the latest competitor to try and fail to overcome Bloomberg after Dow Jones bowed out of the business, spinning off 55% of Refinitiv to funds managed by Blackstone. The private equity firm has turned a quick profit, more than doubling its $3 billion-plus equity investment in less than a year.
Win-win-win
However, Blackstone’s profit exists only on paper; the all-stock acquisition includes a lock-up for LSE shares used to pay for it. The plan calls for LSE to issue $14.8 billion in new shares and assume Refinitiv’s net debt of $12.2 billion.
The exchange group has benefited from a more than 40% increase in its share price since mid-December, giving it the capacity to make an all-share offer. If investors are concerned about dilution, they didn’t show it when the announcement was made, as LSE shares surged more than 15% to a record close of 6,562 pence.
Refinitiv’s private equity shareholders would end up with 37% of the merged business although only 30% of voting rights, leaving Thomson Reuters, with about 15%. However, the Canadian group has been criticized for having sold off Refinitiv too cheaply and allowing Blackstone to unlock much of the gain.
Schwimmer makes his mark
Investors see an easier path to regulatory approval in this deal, but they also have confidence that David Schwimmer, a former Goldman Sachs banker who became CEO of the London exchange last year, will do a better job than his predecessors of closing the deal.
Shareholders expected nothing less from SchwimmerOpens a new window , whose appointment has played a role in the company’s rising stock price. Schwimmer, who was chief of staff to longtime Goldman CEO Lloyd Blankfein as COO, had advised on the New York Stock Exchange’s takeover of online platform Archipelago and was head of market structure when he left Goldman to take the LSE post.
If the deal goes through, he will be responsible for a substantial step in the transition of stock  exchanges from a platform to match buy and sell orders to a purveyor of data in an environment where analysis of data is becoming a significant financial product.