Debt fears haunt Nasdaq's £2.7bn Stock Exchange bid

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The Independent Online

The Nasdaq admitted yesterday that the massive level of debt it will incur if it succeeds with a takeover of the London Stock Exchange could "impair the operation of our business" and place it at "a competitive disadvantage" with rivals.

The admissions were made in a 15-page document of "risk factors", a large portion of which concentrated on the $5.1bn (£2.6bn) of debt the company plans to take out to finance its £12.43-a-share, £2.7bn, takeover offer for the LSE.

It was filed as the Nasdaq posted at 320-page offer document to the LSE's shareholders, putting its hostile takeover bid on a formal footing. The level of debt being used to finance the LSE bid has caused alarm in some quarters and prompted ratings agency Standard & Poor's to push Nasdaq's credit further into "junk" status.

The exchange admitted that the borrowing could make it vulnerable in the event of an economic downturn, and would impair its ability to raise funds for future acquisitions or simply to refinance the huge loans.

The Nasdaq also admitted that the covenants it had been forced to accept to raise the funds were "even more restrictive than in our current debt instruments" but refused to give details.

The company said it had not put interest rate hedges in place, leaving future earnings at the mercy of the US Federal Reserve Bank, which sets US rates.

Nasdaq has put in place currency hedges which provide some protection from further falls in the value of the dollar, but refused to say what proportion of its bid is covered by these.

The US exchange operator has repeatedly said it has little room to increase its offer based on its current level of borrowings. It said: "Our high leverage limits our financial flexibility."

Nasdaq also said it would take control of the LSE with just 50 per cent of the LSE's shares. Previously it set the hurdle at 90 per cent, at which point a bidder can force the remaining 10 per cent to sell up and cancel the target's stock market listing.

The development is significant because Nasdaq already owns 28.75 per cent of the LSE and needs only 21.25 per cent of the shares to accept the offer to enact its takeover. It was viewed as an attempt to put pressure on the hedge funds that hold more than 30 per cent of the London exchange.

Because Nasdaq structured its bid as a "final" offer, it is locked into the £12.43 price unless a counter bidder comes in or in the event of an LSE board recommendation. Yesterday the London exchange reiterated its rejection of the bid.

But Bob Greifeld, the Nasdaq chief executive, said: "We continue to believe that the offer represents a full and fair value for LSE shareholders, taking into account both the successes of the business but also the new competitive threats which LSE will face in 2007 and beyond."

By contrast to the Australian investment bank Macquarie and Swedish exchange operator OM Gruppen - both of which have failed with hostile bids - Nasdaq chose not to attach a glossy brochure attacking the LSE management, common practice with hostile bids.

It is trying to focus hedge funds' minds on what would happen to the share price should the offer fail.

While the Nasdaq gave shareholders until 11 January to accept, the bid must remain open until 27 January and the Nasdaq has the option to extend it until 10 February.

The LSE is understood to believe its view that the offer undervalues the business has the support of many hedge funds, which want an increased offer close to the LSE's current share price.

The LSE is expected to file its defence document next week even though it has the option of waiting until Boxing Day.

Talks have been held with the US corporate raider Samuel Heyman, who is the exchange's second biggest shareholder, and other leading hedge funds in recent weeks. Sources close to the exchange described them as "constructive".

However, Nasdaq is expected to emphasise the "competitive threats" facing the LSE at a series of forthcoming meetings with LSE investors. It is expected to dwell on the threat posed by "Project Turquoise" the pan-European share trading platform planned by a group of seven investment banks that will rival all the continent's big exchanges.

Despite the Nasdaq's continuing insistence that it has little room to raise its bid, the shares closed at £13.20, well ahead of the offer price although few shares changed hands yesterday.

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