What To Make Of M&A Activity At London Stock Exchange Group Plc, ICAP Plc & Tullett Prebon Plc

The city has been awash with yet more M&A chatter in recent days, with ICAP Plc (LSE: IAP) agreeing the sale of its voice broking business to Tullett Prebon (LSE: TLPR) and speculation re-emerging that London Stock Exchange (LSE: LSE) could soon make a bid for the what’s left of ICAP.

Many shareholders will now probably be wondering what the future holds for them, whether the LSE purchase does or does not go ahead, so here is a brief overview.

Significant added value

After recently acquiring Frank Russell Company, the US firm responsible for the Russell Indices, LSE was able to make itself the second largest player in US listed ETFs, while consolidating its position as one of the world’s largest providers of index services.

The rumoured tie up with ICAP could see LSE expanding further by extending its reach into the realm of fixed income and currency markets.

In addition to adding anything up to £250m to operating profits, the purchase would also make LSE the world’s go-to organisation for US treasury trading, US dollar based currency trading and post trade risk or information services.

Last year’s all cash acquisition of Frank Russell saw the LSE group grow rapidly while reducing balance sheet leverage at the same time. This was despite the fact that it borrowed £600m to partially finance its purchase. Clever eh?

Given that the deal is little more than pure speculation at present, it is not clear how such a purchase would be financed. However, if LSE is able to pull off a similar coup again then the added value for shareholders would be significant.

A global leader

For Tullett shareholders, the biggest gain to come from the recent sale of ICAP’s voice broking business is probably the elimination of its primary competitor within a key area for the group.

While voice broking has been under pressure for some time, the spin off seems to present an opportunity for both companies in that ICAP jettisons the voice unit and Tullett becomes the global leader in this area.  

The purchase will be funded by an all share offer that is almost equal to the pre-purchase equity value of Tullett. This means that Tullet shareholders will own around 45% of the larger, post-purchase group, while ICAP shareholders will get 36% of the enlarged Tullett Prebon in return. 

The remaining ICAP group will also own a 19% minority stake in Tullett.

A big positive

First and foremost, ICAP shareholders will benefit from its disposal of the voice broking business because it will leave the group a lot more focused upon its key growth areas.

While it could lose up to 20% of its earnings in the process, ICAP would do this to become a hybrid fin-tech and finance business, which may then prompt investors to afford the shares with a higher valuation.

Any such valuation would probably be much closer to those of other financial technology businesses, as opposed to that of a financial institution.

Secondly, the group will at least reduce, but could even entirely circumvent, the need to hold regulatory capital buffers. This is a big positive for investors given the ever onward march of financial regulation in recent years.  

Overall, the deal to dispose of voice/global broking will probably be a net positive for shareholders, regardless of whether LSE Group decides to make a bid for the remainder of ICAP.

If LSE does bid, then it will need to take account of ICAP’s more focused structure when determining its offer price.

If it doesn’t bid, ICAP shareholders will probably benefit from recent events anyway, given the eventual re-rating or re-valuation that could occur, as technology and information services become an ever larger part of the business.