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LSE to increase stake in LCH for €438mln as third quarter revenue misses expectations

The LSE reported a 5% rise in revenue for the third quarter, driven by a strong performance in the LCH and FTSE Russell businesses
The deal is expected to be completed by the end of the year

The London Stock Exchange Group Plc (LON:LSE) said it has agreed to a further stake of up to 15.1% in clearing house LCH Group Holdings – a key driver of growth in the third quarter.  

The British stock exchange will pay up to €438mln in cash for the shares, which will take its ownership in LCH to more than 80%.  The group will acquire the stake from minority shareholding using cash and existing debt facilities.

The deal is expected to be completed by the end of the year.

LSE bought a majority stake of about 57.8% in LCH in 2013 and purchased additional shares in late 2017 and 2018.

Third quarter revenue growth led by LCH and FTSE Russell 

In a separate trading statement, LSE revealed a strong performance in the LCH and FTSE Russell businesses boosted third-quarter revenue.

Total income from continuing operations for the group gained 8% to £522mln and revenues edged up 5% to £464mln. On a like-for-like basis, income increased 7% and revenue grew 4%. Analysts had estimated an income of £530mln pounds and revenue of £476mln. 

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

LCH delivered a 5% increase in revenue to £120mln, boosted by growth in over-the-counter (OTC) clearing.

The FTSE Russell unit, which provides stock market indices and associated data services, saw revenue jump 20% to £162mln.

Weak spots for LSE were its capital markets, technology services, CC&G and Mote Titoli divisions, which all posted lower revenues for the quarter.

David Schwimmer, the former Goldman Sachs banker who joined LSE as chief executive in August, said: "The Q3 results show continued momentum across the group, reflecting another period of operational execution and investment in the business."

He added: "Since I joined LSEG in August my initial impressions of the group's strengths have been reinforced as I have spent time with our businesses and met with key stakeholders."

Following the acquisition of the LCH stake, the company expects net debt to earnings ratio will be towards the top end of its target leverage but believes this should reduce quickly as it continues to generate strong cash flows. 

Euroclear an obvious acquisition target for LSE, says analyst

Russ Mould, investment director at AJ Bell, said the market has been waiting for Schwimmer to communicate his strategy for this business. 

“There has been some speculation that the new CEO could chase a bigger acquisition, given he comes from an M&A background," he said. 

"The obvious target is Euroclear which would strengthen London Stock Exchange’s position in Europe. That wouldn’t be an easy deal to pull off given rival ICE owns 10% of the business."

Mould said he would not rule out the possibility of ICE itself attempting to merge with LSE but a more plausible possibility is the UK stock exchange bidding for US exchange operator CME.

“The latter is a bit busy at the moment dealing with Britain’s antitrust watchdog regarding its efforts to buy NEX Group, but longer term there could be merit in a tie-up with the London Stock Exchange," he said.

Shares in LSE were up 0.9% to 4,325p in mid-morning trading. 

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