(Recasts, adds detail, background, Northwestern Mutual comment, analyst comment)
By Pamela Barbaglia, Clare Hutchison and Anjuli Davies
May 20 (Reuters) - 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 regulation.
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 under management.
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 other bourses.
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)