Shares in London Stock Exchange (LSE) fell sharply on Friday as weak underlying earnings from its takeover target LCH Clearnet raised fresh concerns over the deal. The LSE plans to pay 366 million euros ($488.3 million) for 60 percent of LCH, which as a clearing house makes its money by acting as a middle man in financial trades and guaranteeing to complete deals if one of the parties involved can't.
The acquisition offers the LSE diversification from its equities base into the many debt and currency markets in which LCH operates, but the exchange has already cut its offer price after regulatory demands that clearing houses like LCH hold more capital. Results from LCH showed underlying operating profit fell 13 percent to 92.8 million euros in 2012. Operating costs rose 8 percent to 298.7 million, as savings from a transformation programme were more than offset by investments in infrastructure and regulatory-driven demands.
Phil Dobbin, analyst at Espirito Santo Investment Bank, said while the headline revenue figure - which was up 24 percent on a net basis - was OK, the underlying performance was less so. "EBITDA (earnings before interest, tax, depreciation and amortisation) fell on the year and that is what you take into the deal, which is disappointing," said Dobbin.
Other London-based traders also pointed to LCH Clearnet's rising costs and shrinking EBITDA as cause for the fall in LSE stock, in addition to the exchange's strong advance into the results. Shares in the LSE were down 5 percent at 1,278 pence by 1136 GMT, having fallen as low as 1,242p, wiping out the stock's gain over the past week which carried it to a more than four-year high.
"We wouldn't comment on the reasons for a rise or fall in the share price," an LSE spokesman told returns. "We maintain that the LCH deal is a very positive development for the group." LCH - owned by its clients and exchanges - also reported 2012 operating profit of 99.9 million euros, more than double 2011's 45.1 million euros. Chief Executive Ian Axe told Reuters the clearing house's growth would be "steady" in 2013, as it rolls out new services and extends its reach in areas like Asia.
"We won't be looking to generate those sort of profit rises year on year," he said, referring to the doubling of operating profits in 2012. LCH Clearnet's appeal to the LSE is enhanced by the clearing house's potential to benefit from new European and US rules that will force the use for middlemen for customised "over the counter" derivatives trades, to increase transparency and minimise risks to the financial system should one side not be able to pay up.