London Stock Exchange reduces offer for clearing house

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The London Stock Exchange has cut its offer for LCH.Clearnet by almost a third to 410 million euros – £333m – to reflect rising capital requirements, sources said yesterday.

Sources said the stock market has made a revised offer of about 13 euros a share, down about 6 euros on the deal it agreed with LCH management and shareholders in April.

The deal is important to the LSE because it takes the exchange further into clearing, a potentially lucrative area, with regulators looking to mandate the use of clearing houses in the wake of the collapse of Lehman Brothers.

The LSE said yesterday it was in talks with LCH over the “potential changes to the commercial terms of the transaction” but declined to comment further. LCH also declined to comment.

The reduced offer needs to be accepted by the LCH board and then it will have to go back before LCH shareholders, who are not guaranteed to accept the lower bid, according to analysts.

LCH.Clearnet shareholders include nearly 100 of the world’s largest trading banks and two exchanges, the London Metal Exchange and NYSE Euronext.

“It’d be positive if it could secure a price reduction on this scale,” said Richard Perrott, an analyst at Berenberg Bank.

The LSE was forced to renegotiate the deal to reflect proposals by European regulators to introduce higher capital charges on clearing houses, such as LCH, next year.

Analysts expect LCH’s capital shortfall will be less than early estimates and should come in at about 220m euros.

The LSE would only need to pay 60 per cent of that, but that would still leave it on the hook for at least 100m euros, which its shareholders will want factored into the terms of the LCH takeover.

The reduction in offer price to 13 euros a share means the LSE’s total offer for the 60 per cent of LCH shares has fallen from about 600m euros to about 410m euros.

“While we have previously believed a cut in the purchase price was warranted and likely, we are surprised – and pleased – that the size of the cut is so substantial,” said Peter Lenardos, an analyst at RBC Capital Markets.

Clearing houses sit between trading firms and ensure trades of securities such as stocks and bonds are completed, holding cash to refund firms left out of pocket by a counterparty default.