Jeremy Warner's Outlook: LSE's horizontal challenge to vertical Deutsche

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The Independent Online

Clara Furse, chief executive of the London Stock Exchange, finds herself in an impossible position.

Clara Furse, chief executive of the London Stock Exchange, finds herself in an impossible position. She wants to play the lead role in the reshaping of Europe's equity markets which Deutsche Börse's bid for the LSE has made all but inevitable, but as the smallest of the three big European exchanges in terms of market capitalisation, she finds herself the hunted rather than the hunter.

She believes passionately that Deutsche Börse's 530p-a-share cash offer undervalues the LSE, yet she knows that, in the absence of anything better, it may well be a price most shareholders want to accept. And, if truth be known, she would be more than happy to see Deutsche blocked on competition grounds, but knows she cannot argue the case for it as this would be a breach of her fiduciary duty to shareholders to get the best possible price for the business.

The LSE has made a virtue in recent years out of the fact that it is a pure cash equity market, in contrast to Deutsche Börse, which also does the clearing and settlement of its equity transactions. Likewise, Euronext, the Paris-based exchange, owns a substantial stake in its clearing operation, though these days settlement is done by an entirely independent company.

The LSE has long argued that the vertically integrated model operated by Deutsche and to a lesser extent Euronext is anti-competitive, in part because it prevents price competition for settlement and clearing, but also because it makes cross-border settlement more costly and difficult, which in turn means exchanges cannot effectively compete with each other for the trading function.

The LSE reckons its own IT is streets ahead of the other two, a contention it believes proved by the fact that it has managed to grow its top-line equity trading revenues right through the bear market of the past five years. The others have struggled to maintain revenue in the cash market for equities.

Since the exchange cannot overtly argue this line itself with regulators, it must rely on its customers to do so on its behalf. On the face of it, they have good reason. Last summer, Werner Seifert, chief executive of Deutsche Börse, matched the tariff reductions put through for trading by the LSE and Euronext, but at the same time increased his settlement charges to compensate. Talk about shooting yourself in the foot.

Yet I doubt customers feel quite as passionate about it as the LSE does. Provided their interests are protected and the charging structures are transparent, they may not worry too much. Mr Seifert promises present contracts for settlement and clearing will be honoured. The carrot of more LSE tariff reductions is offered to try to bring customers on side.

Mr Seifert would frankly much prefer to live in London than Frankfurt and, if he could, he would offer the further carrot of basing the combined operation in the City rather than Germany. How acceptable that would be to Frankfurt, which still harbours vague ambitions of being a rival European financial centre to the City, remains to be seen. Yet one thing that is not negotiable is a sale or spinning off of Deutsche Börse's clearing and settlement functions. These are the big cash generators for Deutsche Börse; they are the financial powerhouse that give Mr Seifert the ability to pay a big cash premium for the LSE. Without them, the justification for the takeover premium falls away.

Any thoughts the LSE might have of ending up in the driving seat is therefore just wishful thinking. This isn't what Frankfurt has in mind at all, nor is it the way things are likely to work out. Euronext would make a more equal partnership, but it lacks the financial firepower to act as white knight. Of course this doesn't necessarily matter if a Euronext merger is what customers want to see happen. Their leverage in deciding the outcome is almost as great as the shareholders and, in many cases, they are one and the same thing. A lot of hot money has flowed into LSE shares over the past month, giving the speculators their say in the matter too. We don't yet know who's going to come out on top. Only one thing can safely be said; there will be no early resolution. The debate is set to run and run.

UBM goes for Levin

Trouble at United Business Media, where an outsider, David Levin, has been selected to succeed Clive Hollick as chief executive in preference to the internal front runner, Malcolm Wall. Mr Levin seems a good enough choice, having cut his teeth as finance director and later chief operating officer at Euromoney before ending up atSymbian, the mobile phone software house. Now shorn of its TV and newspaper interests, UBM is these days confined to technical, computing, medical and scientific publishing, for which Mr Levin seems well qualified.

Even so, the appointment will be a big disappointment for Mr Wall, who was virtually promised the top job by Lord Hollick when he was lured back from Granada three or four years ago. He's not expected to hang around long enough to witness Mr Levin's arrival. Lord Hollick and Mr Wall go back a long way to Lord Hollick's days as a budding TV mogul. Between them they assembled an impressive array of ITV franchises, which they sold for a stunning cash price to Granada right at the top of the market after it emerged they couldn't expect to win the consolidation game into a single ITV. Granada eventually won that particular prize, but there is little doubt who got the better end of the bargain.

Mr Wall must have realised his number was up when UBM brought in Carol Leonard of Whitehead Mann to do the executive search. In these politically correct days, chief executives don't get to choose their successors, even in companies as autocratically run as UBM was under Lord Hollick. Mr Wall has failed, so far, to land a big job back in TV, but he shouldn't be short of alternatives. It will be equally interesting to see what Lord Hollick does to keep himself out of mischief. For the time being, he's not saying.

Teesside Corus

Phillipe Varin, the Frenchman who runs Corus, must think that all of his noëls have come at once. First, his biggest and most vexatious shareholder, the Russian investor Alisher Usmanov, decides to bale out of the stock. Then, a bunch of overseas steel companies provide a solution to one of his biggest commercial headaches - what to do with Corus's Teesside plant and its 1,700 workforce, which will become surplus to requirements very shortly.

The solution is not quite what Corus originally had in mind but it is none the less an eloquent one. The plan had been to find a buyer for Teesside who was prepared to take a majority stake in the plant and bankroll its investment needs. Instead, Corus has opted to retain 100 per cent ownership of the plant but sell three-quarters of its output over the next decade to a collection of foreign steel makers at cost. In return they will fund most of the necessary capital expenditure and pay Corus £82m, of which £38m is upfront. So Corus gets cash in, retains control of the assets and doesn't have to worry about yet another huge redundancy bill.

It is the kind of deal which has only been made possible because steel prices are at sky-high levels and suddenly everyone is scared of running out of supplies. Corus largely has the Chinese to thank for that, since they are responsible for sucking in raw materials to feed their explosive economic growth, stoking up prices in the process.

The bubble will burst sooner or later and already there are signs that demand from China is beginning to soften. But in the meantime, Corus is making hay. Last year's £208m operating loss will be turned into a profit of at least £600m this year, easily enough to secure M. Varin's bonus. In fairness, part of that financial turnaround is down to the "restoring success" programme the new Corus boss began when he arrived. But a larger part is due to the trade winds blowing from the east. Having restructured engineering steels, sorted out Teesside and straightened up the balance sheet, the one big remaining item of business for M. Varin is to find a buyer for Corus' aluminium business. Perhaps he will make that his new year's resolution.

jeremy.warner@independent.co.uk

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