(Recasts, adds detail, background, Northwestern Mutual comment,
By Pamela Barbaglia, Clare Hutchison and Anjuli Davies
May 20 London Stock Exchange Group Plc
has entered exclusive talks to buy U.S.-based asset manager and
stock index provider Russell Investments, in an estimated $3
billion deal that would allow the bourse operator to increase
its U.S. presence.
The move fits with LSE Chief Executive Xavier Rolet's
strategy to diversify the business, moving into growth areas
such as market data and post-trade services to offset lower
trading volumes in an uncertain economic climate and increased
The British group had said last week it was in talks on the
possible purchase of Seattle-based Russell and its latest
statement shows it had beaten off possible rival bidders.
A source familiar with the talks said on Tuesday the LSE's
interest lies in Russell's index business, which owns the
Russell Global Index series for stocks which is popular with
U.S. traders and investors.
The LSE did not say if it intended to sell Russell's
investment management arm, which has some $260 billion in assets
The LSE has already expanded in indexes with the 2011
purchase from Pearson Plc of the 50 percent it did not
already own in index provider FTSE International, manager of the
FTSE 100 index of blue-chip British stocks.
Combining with Russell could be "transformational" for FTSE
International, the source added, giving it a much greater
presence in the United States and the ability to compete with
the likes of MSCI and S&P Dow Jones.
Media reports have estimated Russell's indexes earnings at
$200 million. A similar multiple to that of MSCI would give that
business a value of around $2.4 billion, while the asset
management arm is estimated to be worth $1 billion, from pretax
earnings of around $100 million.
Indexes are important to investors because rather than
making choices on individual stocks, large money managers often
track stock market measures such as those compiled by Russell
and the LSE. Russell's indexes have $5.2 trillion in assets
benchmarked to them.
Exchanges can make money by using their data to create
indexes, which provide investors with more ways to trade. The
LSE also earns revenue by licensing out its existing indexes to
RBC Capital Markets analyst Peter Lenardos said in a note to
clients that the deal made both strategic and financial sense,
noting it would propel the LSE to number three position globally
as provider of indexes to exchange-traded funds.
Lenardos said the deal "would add more recurring,
predictable revenue, and would allow (the LSE) ... to fully
penetrate the U.S. market, where half of the world's AUM (assets
under management) resides."
A spokeswoman for Russell's parent Northwestern Mutual
referred to a statement published by the company in January,
when it first said it was exploring strategic alternatives for
the unit including a possible sale.
Northwestern wants to sell all of its majority interest in
Russell, meaning the LSE - which fended off interest from MSCI,
Canadian Imperial Bank of Commerce and several private
equity houses to become lead bidder - may look to spin off the
investment management business at a later date.
Talks between the LSE and Russell's parent life insurer
Northwestern Mutual are continuing and there was no certainty a
transaction will be forthcoming, the LSE said in a statement.
It said last week any deal would be partly funded by selling new
stock to existing shareholders.
A source told Reuters an outcome could still be several
weeks away as detailed "due diligence" on the target still needs
to be carried out.
(Editing by Louise Heavens and David Holmes)