Stock of the day 29/02/2016 – London Stock Exchange Group PLC

Whilst the renewal of the London Stock Exchange’s decades-long M&A saga with Deutsche Boerse is hogging headlines the company still reports its full year figures on Friday.

A slightly rocky, if generally positive, 2015 ended strong for LSE. A mid-December update that, whilst showing a slowdown in the amount of money raised on the exchange for the first 11 months of the year, saw the company cheer a ‘robust’ performance despite ‘more challenging market conditions’ helped LSE hit an all-time high of £27.86 just before the year ended.

However, like the rest of the market, LSE swiftly fell away from its highs as the New Year got underway, the torrid trading of the first few weeks of 2016 sending the stock all the way to a 14-ish month low of £20.84 by the start of February. Yet things were soon to pick up for the exchange.

On the 23rd February reports came out that LSE was considering a merger with its German counterpart Deutsche Boerse, worth £20 billion, sending the stock to a fresh peak of £28.83 following a 21% surge in few days after the announcement. The stock sits at a current trading price of £27.09 (IT-Finance.com, 29/02/2016).


(Source: IT-Finance.com 29/02/2016)

What is interesting about the deal is that it has almost happened twice before, once in 2000 (when an agreement between the companies was destabilised by a bid from Sweden’s OM Gruppen) and then again in 2005 (where LSE rejected a £1.3 billion cash offer from DB). Things are ostensibly progressed better this time around; the deal would see the newly created firm based in London but likely headed-up by Deutsche Boerse’s Carsten Kengeter, with the German exchange holding a 54.4% stake in the company to LSE’s 45.6%.

Of course, any update on the Deutsche Boerse deal will likely outshine Friday’s figures themselves, with investors chomping at the bit for news on the potentially historic merger. Yet the results themselves could have an important part to play. Analysts are expecting an 86% surge in revenue to £2.4 billion, leading its pre-tax profits to nearly treble to £538.2 million; the strength of those figures has led some to question the wisdom of the deal, arguing that there is little incentive for LSE to transfer the majority of its power and independence to its Frankfurt-based rival when it is performing so well on its own.

And just to add another looming complication to the potential pair-up, both companies have stated that a Brexit would effectively end the chances of the merger going ahead. And that’s if the regulators approve!  It seems that there is still a long way to go if the deal is to avoid the same fates as its 2000 and 2005 predecessors.

London Stock Exchange Group PLC has a consensus rating of ‘Buy’ with an average target price of £28.10.