Majestic Research

Bloomberg.com

LSE Shares Jump After Nasdaq Buys 15 Percent Stake

Published: April 12, 2006

Shares of London Stock Exchange Plc surged after Nasdaq Stock Market Inc. bought a 15 percent stake, fueling speculation the U.S. company will make a second takeover attempt for Europe’s biggest equity market.

The shares jumped 15 percent to a record 1,198.5 pence after Nasdaq bought 38.1 million shares from LSE’s biggest investors, Ameriprise Financial Inc.’s Threadneedle Asset Management Ltd. and Lloyds TSB Group Plc’s Scottish Widows Investment Partnership. 

Nasdaq, whose 2.4 billion-pound ($4.2 billion) offer for the company was rejected last month, paid 1,175 pence each for the shares, valuing the company at 3 billion pounds. LSE said in a statement today after the market closed that the current share price doesn’t reflect its growth prospects and the company is exploring possible “discussions with other major exchanges.”

LSE “is playing for time and perhaps aiming to see if it can flush out another bidder,” said Stuart Fraser, a fund manager at Brewin Dolphin Holdings, which oversees about $28 billion, including LSE shares. “The only exchange that can afford to pay this kind of money now is the New York Stock Exchange.”

NYSE Group Inc. Chief Executive Officer John Thain, 50, has said he wants to be a leader in consolidating exchanges around the world. Euronext NV, which runs the Paris and Amsterdam stock exchanges, has been studying a potential combination with LSE since December 2004.
NYSE spokesman Christiaan Brakman and Euronext spokesman Kevin Byram declined to comment on Nasdaq.

‘Head Start’
“Nasdaq’s stake provides a head start in the event of a bidding war,’’ said Michael Long, an analyst at Keefe, Bruyette & Woods Ltd. in London who rates the stock “outperform.”
Threadneedle, which was LSE’s biggest shareholder, sold Nasdaq about 35.4 million shares, equivalent to almost its entire holding in the U.K. exchange. Scottish Widows sold Nasdaq about 2.7 million shares, leaving it with a 4.3 percent stake in the company.

LSE officials are prepared to meet with Nasdaq as it is now the biggest shareholder, said three people from the U.K. exchange who declined to be identified before a date is set. Bethany Sherman, a spokeswoman for Nasdaq, and LSE spokesman John Wallace declined to comment on a potential meeting.

Shares of Nasdaq rose $1.37, or 3.4 percent, to $42.22 in composite trading in New York, bringing their advance since the company’s first bid for the LSE to 6.9 percent.

‘Offense and Defense’
Nasdaq is “playing offense and defense,’’ said Rick Wetmore, an analyst at Berwyn, Pennsylvania-based Turner Investment Partners, which manages $20 billion including 1.9 million Nasdaq shares. “It forces the hand of anyone who would be interested in acquiring the London Stock Exchange to have to talk to Nasdaq.’’

A combination of LSE and New York-based Nasdaq, led by CEO Robert Greifeld, 48, would create the first transatlantic stock market, listing more than 6,000 companies, valued at a total of about $7.3 trillion.

LSE handles trades for $600 billion a month, more than any other stock market outside the U.S., data from the World Federation of Exchanges shows. The 308-year-old exchange is home to some of Europe’s largest companies, including BP Plc, GlaxoSmithKline Plc and Vodafone Group Plc.

“The London Stock Exchange is a critical piece on the chess board,’’ said Doug Atkin, the former head of Instinet Group Inc. who now runs New York-based firm Majestic Research LLC."So you have to put a big premium on the price.’’

Next Move
A plan by LSE CEO Clara Furse, 48, to return 200 pence a share to investors, means Nasdaq effectively paid 976 pence a share for the stake, according to Richard Repetto, an analyst at Sandler O’Neill & Partners who rates Nasdaq ``buy.’’

Under U.K. takeover rules, Nasdaq can’t make another bid for the entire company for six months unless LSE recommends a deal or a competing bid is made. Nasdaq can purchase as much as 29.9 percent of LSE before rules would require it to make an offer for all of the stock. It can buy as much as 10 percent of LSE next week and 5 percent the following week, according to the takeover law.

“This stake makes it more difficult for any other suitor to acquire the LSE,’’ Mamoun Tazi, an analyst at Man Securities in London, wrote in a note to investors today. Other potential bidders “now have to deal with Nasdaq as the exchange’s largest shareholder. We believe that it will eventually attempt to take over the LSE.’’ Tazi rates LSE stock a “buy.’’

Euronext
Euronext, whose shareholders are pushing for a merger with Deutsche Boerse AG, said on April 3 that it was talking “with a number of parties’’ about consolidation. Euronext and LSE met to discuss an all-share “merger of equals,’’ London’s Observer reported April 9, without saying where it got the information.

Nasdaq’s purchase makes the chances of a deal between Deutsche Boerse and Euronext “stronger,’’ said KBW’s Long. “Euronext and Deutsche Boerse shares have been weak on the back of recent press stories that Euronext may be looking to jilt Deutsche Boerse in favor of LSE, with the risk that no deal actually gets done.’’

Euronext shares climbed 1.15 euros, or 1.7 percent, to 67.35 euros ($81.56) in Paris. Shares of Frankfurt-based Deutsche Boerse, which kicked off the bidding for LSE with an offer in December 2004, climbed 1.5 percent to 112.48 euros.

Possible Downgrade
After today’s share gain, LSE’s stock trades at 34 times estimated earnings for the fiscal year ending March 2007, surpassing the price-to-earnings ratios of any other European exchange, data compiled by Bloomberg show.

“London’s strategic position is much stronger than its actual corporate value,’’ said Georges Ugeux, a former NYSE managing director who is now CEO of New York-based Galileo Global Advisors LLC. “I would question any attempt to buy London because at this price it more than fully values the company.’’

Moody’s Investors Service today lowered its rating on Nasdaq’s credit rating to Ba3 from Ba2, saying Nasdaq’s investment in the LSE increases the likelihood it will prevail in acquiring the whole company. The rating change affected about $825 million in debt, according to Moody’s.

“Under most conceivable deal structures, a successful acquisition of the LSE or another strategic exchange would result in a very significant increase in debt,’’ the New York-based rating service said in a statement.

Standard & Poor’s yesterday put Nasdaq’s BBB- credit rating, which is one notch above junk-bond levels, on review for a possible downgrade.

Greenhill & Co. and the New York-based law firm of Skadden, Arps, Slate, Meagher & Flom LLP advised Nasdaq on the deal.