* LSE to buy up U.S. indexes group Frank Russell
* Deal will boost earnings in first full year
* LSE to launch $1.6 billion cash call in September
* To draw $1.1 bln from existing and new debt facilities
* Shares up 6 pct
(Adds analyst comment, updates shares)
By Freya Berry and Kirstin Ridley
LONDON, June 26 The London Stock Exchange
has unveiled the largest purchase in its history,
snapping up U.S. indexes group Frank Russell for $2.7 billion to
move deeper into the world's largest financial services market
and sending its shares surging.
Europe's oldest independent bourse, which has fought off a
string of takeover approaches in its 213-year history, said on
Thursday it would help fund the acquisition with a $1.6 billion
rights issue of new stock.
It said the move would boost earnings in the first full year
after the deal and would catapult it into third position in the
booming market for exchange traded funds (ETFs) - low-cost funds
that provide an alternative to active fund management - behind
global market leaders S&P Dow Jones and MSCI.
Analysts welcomed a deal that creates a compiler with around
$9.2 trillion of assets benchmarked against the performance of
its indexes, which include the UK's FTSE 100 and other
high-profile market measures.
Yet some cautioned it still requires regulatory and
shareholder approval and saddles the LSE with hefty debt that
could affect its credit rating if market conditions worsen. The
LSE said it would draw $1.1 billion from existing and new debt
facilities to help fund the deal.
"We believe that this transaction will allow LSE to compete
more effectively with MSCI ... and will provide more recurring
revenue," said analyst Peter Lenardos at RBC Capital Markets,
setting a new price target for LSE shares of 22.00 pounds.
"The transaction further diversifies LSE away from capital
markets and the UK and towards information services and North
The transaction leaves the LSE with net debt of 2.4 times
EBITDA, which the group said it aimed to cut to 2 times over the
next 12 months, the upper end of its stated preferred range.
LSE shares, which have risen around 15 percent since the
start of this year, gained 6 percent at 19.81 pounds by 1345
GMT, outperforming a flat FTSE 100.
LSE Chief Executive Xavier Rolet has been under pressure to
secure a transformational deal since an aborted merger attempt
with Canada's TMX group in 2011, which left a residue of
speculation the operator could itself fall prey to a takeover.
It remains to be seen whether the Russell acquisition fits
that bill. Frederic Ponzo, managing partner at consultancy
GreySpark Partners, said it adds beef to the business but was
not game changing.
"It makes the LSE marginally harder to take over, but if
such a deal happened, the latest addition to the LSE Group would
be immediately carved out and sold by the acquirer," Ponzo said.
"However, it makes the (LSE) ... more diversified, so maybe
there is value in that. But I am doubtful of the cross-selling
opportunities that have been touted with this deal."
One option to further beef up the LSE's assets could be the
purchase of Barclays' Index, Portfolio and Risk
Solutions business, which has been put up for sale and includes
a basket of over 98 major indexes.
"They (the LSE) would be an obvious candidate for that
business," said one source close to the Russell deal.
The LSE, which said in May it was in talks with Russell's
owners Northwestern Mutual on a possible buy, said the enlarged
company would yield annual cost savings of $78 million and boost
annual revenue by $30 million by year three.
Annual revenue would rise by almost $50 million by year
five, it said.
The LSE said it was reviewing the position of Russell's
investment management business, which has $256 billion in assets
under management. But it declined further comment on options for
a business analysts say does not provide an obvious fit.
"We think a sale of the investment management division is
likely - it is probable that the complexity of the deal meant
they were not able to organise a seller in advance," said Mark
Thomas, analyst at Edison Investment Research.
The group wants to launch its first-ever rights issue in
September and complete the takeover by the end of the year,
after which Russell Chief Executive Len Brennan will join the
Northwestern Mutual began exploring the sale of Russell in
January after deciding it was no longer a core business. Reuters
reported in April Canadian Imperial Bank of Commerce,
MSCI and several private equity firms were considering bids.
Barclays and Greenhill acted as financial advisers
and joint sponsors on the deal, which was also brokered by
Barclays and RBC Capital Markets. Peter J. Solomon and Robey
Warshaw also advised on the deal.
(Additional reporting by Kate Holton; Writing by Kirstin
Ridley; Editing by Pravin Char and David Holmes)