Berenberg ups target London Stock Exchange, says rationale for exchange M&A is “inescapable”

Berenberg has raised its target price for the London Stock Exchange Group PLC (LON:LSE) in a note on global bourses operators in which it says the rationale for exchange M&A is “inescapable” and looks at a number of scenarios.

The German investment bank hiked its target for the FTSE 100-listed firm to 5,380p, up from 4,970p previously and repeated a ‘buy’ rating on the stock which was currently trading at 4,755p, down 0.2% on Wednesday’s close.

READ: LSE posts above-forecast first-half profit, activating contingency plans in case no Brexit deal

In a note to clients, Berenberg’s analysts noted that earnings rise by an average of 32% when two exchanges merge, with cost synergies 4 times those of deals in other sectors.

The analysts said that driven by this economic logic, they expect exchanges will continue to explore transformational deals.

They pointed out that this year, both the LSE and Deutsche Börse AG have appointed CEOs with extensive M&A backgrounds, suggesting boards too appreciate the value of inorganic growth.

The analysts also think that competition issues are overstated and, contrary to perception, they believe it is fairly clear which deals competition authorities will and will not permit.

They said|: “The political sensitivities surrounding exchange M&A are more nebulous, but we identify steps exchanges can take to manage these risks, or to avoid them altogether.”

An ICE combination

Looking at M&A scenarios for the LSE, Berenberg’s analysts said they believe there is compelling strategic logic to combining the UK-listed group and US firm Intercontinental Exchange Inc (NYSE:ICE).

They pointed out that their analysis implies such a deal would generate US$945mln of synergies and is likely to receive antitrust approval.

However, they added, the reliance of any deal on equity finance makes the year-to-date de-rating of ICE – relative to LSE – problematic.

The analysts said a base-case merger scenario implies 13% earnings accretion, and 27% total shareholder return from an LSE/ICE deal which is probably insufficient to justify the execution risk currently, although they believe it provides useful downside protection for LSE shareholders.

CME bid possiblity under-estimated

Berenberg’s analysts also think the likelihood of a bid from CME Group Inc (NASDAQ:CME) for LSE may be under-estimated.

They pointed out that an acquisition of LSE by CME is strategically less compelling than an ICE/LSE tie-up, but far easier to navigate through the various competition authorities.

The analysts said their analysis of such a deal implies 22% total shareholder return, but with significantly fewer antitrust issues.

They, therefore, concluded, that for those reasons, they believe a CME bid for LSE is more likely than investors appreciate.

Euroclear takeover has strategic sense

In a third M&A scenario, the analysts think that an acquisition of Belgian firm Euroclear would be around 30% earnings per share accretive for LSE shareholders, while also materially enhancing LSE’s strategic position.

However, they added, the difficulty lies in the execution, with Euroclear’s byzantine corporate governance arrangements and ICE’s 10% stake making any acquisition a challenging undertaking.

But, they concluded: “The strong C-suite contacts and extensive M&A background of LSE’s new CEO may help LSE to arrive at creative solutions to overcome these challenges.”

Story by ProactiveInvestors