LSE would gain from takeover of 'hidden jewel' Euroclear - UBS analysts

LONDON (Reuters) - A London Stock Exchange Group LSE.L takeover of "hidden jewel" Euroclear would make financial sense and give rival Deutsche Boerse DB1Gn.DE a run for its money, UBS analysts said on Thursday.

A worker shelters from the rain as he passes the London Stock Exchange in the City of London at lunchtime October 1, 2008. REUTERS/Toby Melville/File Photo

UBS analysts Michael Werner and Alex Leng said they looked at the merits of a merger between LSE and Euroclear in a 32-page report. There has also been media speculation about a possible deal and LSE said in June it was interested in operating a settlement house.

“We believe a Euroclear acquisition would be value-accretive for LSE,” the UBS analysts said. The LSE would need to pay 6.69 billion euros (6.15 billion pounds) for a 100 percent stake, they said.

“In addition, we believe a Euroclear acquisition by LSE would be a negative for Deutsche Boerse-owned Clearstream, Euroclear’s main competitor, as it would face stronger competition from Euroclear under LSE’s stewardship.”

A takeover would also give the LSE control over its own settlement house after Britain leaves the European Union, Brussels-based Euroclear comes under the bloc’s rules.

LSE and Euroclear had no immediate comment.

After LSE’s planned merger with Deutsche Boerse collapsed earlier this year, there has been speculation about what the two exchanges might do next.

Euroclear is owned by more than 150 of its users, mainly banks, and settles stock and bond trades for LSE and rival pan-European exchange Euronext ENX.PA.

Settlement refers to the final leg of a trade when legal ownership is swapped for payment, coming after trading and clearing. LSE, which trades UK and European shares, already has its own clearing house, LCH.

The exchange has said that collateral management, or helping customers find assets like bonds to back trades, is a growth area.

Euroclear looks after about 27 trillion euros of assets for customers or half the European settlement market, and owning it would give the LSE access to collateral.

“We think Euroclear has not been the most efficiently run organisation ... We believe a Euroclear acquisition would be consistent with the recent comments from LSE’s management,” the UBS analysts said.

UBS analysts also raised their 12-month share prices target for LSE to 3,900 pence, up from 3,350 pence to reflect “strong” first half results and renewal of its clearing contract with Euronext.

At 1000 GMT, LSE shares were little changed at 3,947 pence.

The analysts said LSE had pursued an acquisition strategy that has been “best-in-class” among its European peers.

“This begs the questions, are there any more hidden jewels like LCH or Russell Investments remaining for LSE to acquire?” UBS analysts said.

Reporting by Huw Jones. Editing by Jane Merriman