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LSE Dropping TMX Puts Rolet on Collision Course With Nasdaq

London Stock Exchange CEO Xavier Rolet
Xavier Rolet, chief executive officer of London Stock Exchange Group Plc, said this week that the bourse will “absolutely not” be put up for sale should the TMX Group Inc. deal fall through, according to the Times newspaper in London. Photographer: Chris Ratcliffe/Bloomberg

The biggest rally in three months for Nasdaq OMX Group Inc. may be the clearest sign yet that investors expect the New York-based exchange operator to buy London Stock Exchange Group Plc.

Nasdaq OMX gained 4.7 percent to $25.14 yesterday, climbing the most since April 1, after LSE dropped its offer for TMX Group Inc., saying too few shareholders supported the C$3.32 billion ($3.4 billion) merger. The gain in Nasdaq OMX was the largest since the day it announced a plan to buy NYSE Euronext with IntercontinentalExchange Inc., and signals speculation the company will expand with LSE, according to Capstone Holdings Group LLC and Aite Group LLC.

“If you look at the competitive landscape now and just try to figure out who’s left, if they are looking for that Atlantic tie-in, it just seems like a natural,” said Sang Lee, managing partner at research firm Aite Group in Boston. “Based on past relationships, the fact that both of them have failed at getting bigger in the last few months, it could be an interesting combination.”

The TMX bid’s rejection left both companies without partners amid the biggest wave of exchange takeovers ever, according to data compiled by Bloomberg. The second-largest U.S. exchange company failed three times to buy LSE in the past decade, and Chief Executive Officer Bob Greifeld said this month LSE is one of many companies he talks with about merging.

LSE Shares Rally

Frank De Maria, a spokesman for Nasdaq OMX, and Victoria Brough of London-based LSE declined to comment. LSE shares have rallied 28 percent since Nasdaq OMX and Atlanta-based ICE dropped their bid for NYSE Euronext on May 16. They surged 11 percent today, the most since march 2009. Nasdaq rose 0.7 percent at 12:16 p.m. in New York.

Combining would give Nasdaq OMX a larger European derivatives presence and a bigger chunk of listings internationally. Greifeld, whose hostile offer for NYSE Euronext was blocked by antitrust regulators, may have to convince LSE CEO Xavier Rolet to accept a takeover before announcing it. Rolet said this week that the bourse will “absolutely not” be put up for sale should the TMX deal fall through, according to the Times newspaper in London.

LSE “knows that they are takeover bait, regardless of what they say,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone in New York.

Exchange Mergers

There has been $37 billion in exchange merger announcements since Singapore Exchange Ltd. said Oct. 25 that it would pay A$8.35 billion ($8.94 billion) for Sydney-based ASX Ltd., according to Bloomberg data that included all announced and terminated bids. The Singapore deal was rejected by the Australian government in April. Frankfurt-based Deutsche Boerse AG and NYSE Euronext announced their merger agreement on Feb. 15, a week after the TMX-LSE deal was revealed.

Greifeld and Rolet have said international alliances would make them more competitive. Growing globally may be necessary as the exchanges face a larger competitor in the NYSE Euronext-Deutsche Boerse combination. In announcing the TMX deal, Rolet said the company was “aiming at nothing less than becoming a true powerhouse in the global exchange business.”

Asked what happens now after the failure of the TMX bid, Doug Webb, chief financial officer of LSE, said “we are just getting back to normal.” Webb spoke after a shareholder meeting at LSE’s headquarters in London today that had been scheduled to approve the deal.

LCH.Clearnet Stake

Nasdaq OMX owns 12 equity and options markets in the U.S. and Europe including the Nasdaq Stock Market, Nasdaq Options Market and venues in Sweden, Denmark, Finland, Iceland, Estonia, Latvia and Lithuania. Nasdaq OMX is seeking a minority stake in London-based LCH.Clearnet Group Ltd., the world’s largest swaps clearinghouse. The move would fit into the company’s larger strategy to broaden its revenue stream and expand internationally, Greifeld said.

The LSE “would give Nasdaq a much better hold on continental Europe versus it being on the extreme side like it is now, in the Nordics and Baltics,” said Michael Wong, a Chicago-based analyst with Morningstar Inc. “Nasdaq was looking to do possibly a minority interest in LCH.Clearnet, so it looks like Nasdaq definitely has some interest in London and the more continental Europe.”

Largest Equity Market

Nasdaq OMX would broaden its listings business. The U.K., where the London Stock Exchange is the biggest venue, is the largest equity market in Europe by the value of companies. Greifeld would expand in derivatives. Nasdaq OMX, which leads CBOE Holdings Inc. and NYSE Euronext in U.S. options volume, opened a U.K. electricity trading market this year. LSE operates two derivatives markets, the EDX London Ltd. exchange and IDEM.

Since Nasdaq OMX and ICE dropped their bid for NYSE Euronext on May 16, shares of LSE have outpaced the Bloomberg World Exchanges Index by more than 27 percentage points. The shares jumped 6.8 percent that day, the most since December 2009.

In its joint bid for NYSE Euronext, Nasdaq OMX planned to assume debt and give the Liffe derivatives business to ICE. NYSE Euronext is valued at $8.89 billion, and Nasdaq OMX is $4.44 billion. A takeover of LSE would be more manageable as the company was worth 2.59 billion pounds ($4.17 billion) as of yesterday, half the size of NYSE Euronext.

“Their listings is wonderful, and everybody likes being in London, but they’re really losing volume and squeezed on margins,” said Thomas Caldwell, CEO of Caldwell Securities Ltd. in Toronto, which manages about C$1 billion, including LSE shares. “Most people want to be the acquirer, but the way this business is right now, we’re in the last round of big mergers and you’re either the hunter or you’re hunted.”

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