13th December 2011
FTSE believes it can ride the increasing trend for index tracking. As David Lester, the FTSE chairman and LSE director says the firm will benefit from the increasing trend for index tracking and passive management. "Around 70% of our revenue comes from the buy side. People are indexing more, there is less active management," he said.
This is London notes that for Pearson, the Financial Times publisher which owns the 50 per cent, the deal is another move away from financial data. It sold its 61% stake in financial information provider Interactive Data Corp for $2 billion last May.
And it echoes News Corp's decision to sell Dow Jones to Chicago Stock Exchange group in early 2010 as the Guardian reported at the time.
"It is the only big Western exchange which is not part of the two major blocs: the Deutsche Borse/NYSE combination and the Nasdaq. With Asian consolidation yet to get going it should command a premium rating, not least because if the LSE falls to a predator it will not go cheaply with Mr Rolet at the helm."
"And yet, trading on a multiple of 10.4 times forecast 2010 earnings, with a respectable yield of 3.6 per cent, it is not expensive. We are a trifle concerned about rising debt levels – deals could yet push debt to twice earnings before interest, tax depreciation and amortisation," he writes.
FT Alphaville, incidentally owned by Pearson, however is not so sure.
It writes: "Rolet's paying 50 times earnings before interest! Admittedly the price does fall once £10m of synergies are taken into account, plus an £11m royalty payment that falls away."
And it quotes a report from Numis Securities which does not sound impressed.
"The valuation of £900m means the LSE is paying a huge 96x historic net income of £9.4m. This equates to 22.5x EBITDA (earnings before interest, tax, depreciation and amortization) but there were significant (£22.6m) of royalties to JV owners. Assuming the deal goes through, we would expect a huge gain to be recorded through the P&L for the valuation adjustment on the current LSE stake in FTSE. This is however pure accounting trickery."
FTAlphaville mulling the rationale for the deal concludes thus. "We're guessing the rationale must be something do with giving the LSE a brand name it can use more fully in the ETF and derivative markets. Whether that's worth £450m is another question."
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