Investment: Rolet's back with £450m FTSE deal

James Moore
Tuesday 13 December 2011 01:00

London Stock Exchange


SHARE PRICE: 780P (-40P)

The collapse of the London Stock Exchange's (LSE) bid for the Toronto Stock Exchange left Xavier Rolet bloodied, but definitely unbowed.

Yesterday he proved he can still pull off a deal when he wants to, buying out Pearson from FTSE International, the index business that compiles the FTSE 100 and a host of related indices, for £450m.

The deal works on two levels. Firstly, it is a good fit with the exchange's continuing attempts to force its way into the derivatives business – it has already launched FTSE 100 futures through its electronic trading platform Turquoise, challenging Liffe, the London futures exchange. Having full control of FTSE will help the LSE to develop further products.

Secondly, it fits with Mr Rolet's attempts to seize control of the various nuts and bolts of the exchange business that he doesn't already own. He remains in talks over a deal to buy LCH.Clearnet, which clears trades over the exchange, and two years ago bought Millennium IT, a Sri Lankan technology company, with the aim of securing control of the software that underpins the exchange's various operations and selling it to others.

Yesterday's deal is anything but cheap. The £450m price tag gives a multiple of 16 times the unit's forecast 2011 earnings. However, to put that in perspective, FTSE has grown revenues and earnings at a compound annual rate of 22 per cent.

There are strong arguments for holding the LSE. It is the only big Western exchange which is not part of the two major blocs: the Deutsche Borse/NYSE combination and the Nasdaq. With Asian consolidation yet to get going it should command a premium rating, not least because if the LSE falls to a predator it will not go cheaply with Mr Rolet at the helm.

And yet, trading on a multiple of 10.4 times forecast 2010 earnings, with a respectable yield of 3.6 per cent, it is not expensive. We are a trifle concerned about rising debt levels – deals could yet push debt to twice earnings before interest, tax depreciation and amortisation.

But that's not yet high enough to put us off buying. Despite operating in a brutally competitive business, we think the LSE's shares are under priced. Buy.

Burford capital


SHARE PRICE: 123.5P (+2.5P)

Finding businesses that are recession proof if is a major challenge given the current economic uncertainties.

Step forward Burford Capital. The AIM-listed fund finances litigation, raising money from various sources, private equity, hedge funds etc, and lending it to those pursuing cases with the chance of a big payout.

It bills itself as a financier to the underdog, which is a bit much really, but as an investment opportunity it is really rather interesting.

Typically, Burford nets up to 40 per cent of the proceeds, and until now has been focused on the US market, the world's biggest for litigation. Yesterday it took its first foray into the second biggest, the UK, with the purchase of FirstAssist Legal Expenses, a specialist after-the-event litigation insurance provider, for an initial £10.3m in cash and a maximum £7m deferred earn-out payable in 2014.

Given that litigation seems to grow like Japanese knotweed and FirstAssist expects to generate £6m of earnings this year, its looks like a good deal.

While the UK has only 15 per cent as many lawyers as the US, London does have four legal practices generating fees in excess of £1bn a year. Buy.

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