Business Analysis: Australia's Macquarie considers cash bid for London Stock Exchange

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The Independent Online

The move, which sent LSE shares to a six-month high, could pit Macquarie against the European exchanges Euronext and Deutsche Börse and possibly the Swedish group OMX.

Macquarie, which owns infrastructure, airport and media assets around the world, has come up with an innovative investment style based on buying up assets, largely through debt, and then spinning them off in listed funds which offer investors the prospect of long-term dividends.

The Australian bank, which has 350 staff in London, said the LSE was one of a number of possible acquisitions it was considering but cautioned that its plans were "at the most preliminary of stages" and there was no guarantee it would make an offer for the London market. "If any bid were made, it would be as part of a consortium and if any such offer is made it is likely to be solely in cash," it said.

The investment bank's intention to consider moving into the world of exchanges raised some eyebrows in the City, with some insiders questioning the business case for its takeover approach for the LSE. Macquarie has no interests in stock exchanges or trading platforms and is thus unable to offer any revenue or cost-cutting gains. Much depends on whether it can team up with other trade buyers.

Richard Lacaille, the chief investment officer at State Street Global Advisers, an LSE shareholder, said: "Macquarie may perceive the LSE as a regulated utility with predictable cash flows. The challenge is how they would compete with somebody who had better synergy benefits in terms of pricing."

The board of Macquarie is to hold its first meeting outside Australia in London in October, reflecting the importance of the UK to the fast-growing finance group. In recent months, Macquarie has added the BBC's commercial multimedia business and Wightlink ferries to an A$89bn (£37bn) asset management portfolio that also includes the former NTL communication towers, Bristol and Birmingham airports and the M6 toll road. Nicknamed the "millionaire's factory", the bank's strategy has gained it a market value of more than A$14bn (£6bn). But it has recently run into difficulties with its attempted purchase of Exeter Airport, which has been referred to the Office of Fair Trading.

The group has political clout in the UK too. Lord MacDonald, a former cabinet minister who also used to sit on the boards of Scottish Television and Bank of Scotland, is a senior adviser to Macquarie.

The LSE responded to Macquarie's announcement by saying it had received no formal approach from the bank. It added: "The strong first-quarter results announced by the exchange on 13 July reinforce the board's confidence in the exchange's growth prospects as an independent group."

Privately, the LSE must be thrilled, as the possibility of an auction drove its share price up 4.7 per cent to 578p yesterday. Analysts say an offer price of 600p a share or higher seems increasingly likely. Euronext is seen as the frontrunner, as it should be able to outbid other suitors because of the cost savings it would reap from a deal - although if the competition authorities require significant anti-trust remedies, that could cut the price it is willing to pay.

The Association of Private Client Investment Managers and Stockbrokers welcomed Macquarie's approach as "fantastic news" for the London market. Kevin Sloane, of APCIMS, said: "It's quite extraordinary. It really opens the doors in so many different directions... It proves that you don't need to be an exchange to bid for an exchange. Maybe some of the other large global organisations will enter the frame."

He thought that a takeover by a large international group such as Macquarie might arguably benefit the LSE more than a tie-up with another European exchange. "A big parent would put money in its pockets so it could go on to buying other companies," Mr Sloane said.

Similarly, Justin Bates, an analyst at the brokerage Numis Securities, argued that Macquarie probably saw the LSE as a vehicle for further acquisitions. He said: "So far, all talk has been of the LSE being prey. Why not use the LSE as a consolidator of some of the smaller exchanges?"

Mr Bates also said an outright bid for the LSE by the smaller Stockholm exchange OMX, with a market value of £827m, was unlikely but said he could see it bidding as part of a consortium.

Any buyer should improve the liquidity of the London market's derivatives trading business, which currently generates only 3 per cent of group revenues, Mr Bates added.

Macquarie's announcement spelled good news for the LSE's chief executive Clara Furse, who suffered a severe setback in her attempts to engineer an auction when Deutsche Börse abandoned its takeover proposal in March.

The operator of the Frankfurt stock exchange kicked off the bid battle for the London market with a £1.35bn proposal (530p a share) nine months ago, only to see it rejected by the LSE twice as too low. Then Werner Seifert, Börse's chief executive, faced accusations of "empire-building" from a growing group of hedge funds and other international investors and finally caved in to their demands to drop the bid and return cash to shareholders instead. The failed takeover attempt later cost him his job, and Börse has yet to appoint a new chief executive to take his place.

That cleared the way for Euronext, which runs stock exchanges in Paris, Brussels, Amsterdam and Lisbon as well as London's Liffe derivatives market. It claims to offer cost and revenue synergies of €200m, twice as large as the ones outlined by its German rival (Börse said it was simply more conservative and questioned the validity of Euronext's numbers). Euronext's anticipated savings equate to close to £3 a share.

Börse has reserved the right to table a new offer if Euronext or a third party makes a firm bid. Both proposals are being scrutinised by the Competition Commission, which published preliminary findings last month. While not blocking the proposals, the Commission said that a takeover of the LSE by either of its continental European suitors would damage competition in clearing services.

Börse would have to allay the Commission's concerns that Eurex Clearing, its wholly owned clearing services provider, would end up being used at the London exchange. The watchdog also voiced concerns about Euronext's 41 per cent stake in LCH.Clearnet, the LSE's clearing services provider.

Meanwhile, Macquarie does not face any regulatory hurdles and appears to have deep pockets. Its investment approach is paying off as it brought in a 67 per cent increase in profits last year, to A$823m. The company has come a long way since starting out as an arm of the new-defunct Hill Samuel 20 years ago. Allan Moss, Macquarie's chief executive, told the Independent on Sunday: "We started life as the subsidiary of an English merchant bank. As we expand in London, there is the sense of coming home."