The market exchange sector is a dog eat dog world. Yesterday, London Stock Exchange boss Xavier Rolet bared his teeth and put the UK exchange on the front foot in the increasingly heated battle to control who trades what where. Never mind the audaciousness of snatching the group from under the noses of larger rival MSCI – seen as a more natural buyer of the business.
It is the near-£1bn of capital Rolet will raise from investors that really sets the deal apart. The share sale proves both the commitment of his shareholders to the cause and his ability to raise a war-chest when an opportunity arises. The £1.6bn deal itself is complicated by North-western’s intransigence to split up Russell’s index business from its fund management business.
They come as a pair, but for the LSE the old adage that three is a crowd may be true. Indexing is a far more lucrative business than fund manage-ment, with margins pushing the 50 per cent mark, compared to sub-20 per cent for fund management.
Index deals are often done on higher multiples of about 15 times earnings, compared to about seven or eight times for asset management takeovers. Splitting them up makes sense, selling them together doesn’t.
LSE is set to use the £940m equity portion for the indexing firm and £650m of debt for the fund manag-ement business, suggesting LSE’s ownership of Russell Investments is not long for this world. But the fact Rolet has taken such a bold step – not only of raising the cash but also of swooping for an asset he will have to sell off – shows he plays to win.