London Stock Exchange Group Plc, Europe’s oldest independent bourse, fell the most in more than four months after LCH.Clearnet Group Ltd., the clearinghouse in which it’s taking a majority stake, reported higher costs.
“We are surprised, and not pleasantly,” Peter Lenardos, an analyst at RBC Capital Markets with an outperform rating on LSE stock, wrote in a note to clients. “Integration and turnaround of LCH.Clearnet could be lengthy and complicated.”
Lenardos cited LCH.Clearnet’s full-year operating expenses, which increased 8 percent to 274 million euros ($366 million) while underlying revenue gained 2 percent to 391.5 million euros. The rise in costs isn’t surprising given LCH’s expansion, Ian Axe, chief executive officer of the clearinghouse, said today in an interview.
“We have taken out a large percentage cost base” and replaced a portion of management “as part of our transformation project,” Axe said. “Then we bought a central counterparty, launched FX clearing, expanded our credit default swap business and are seeking expansion in Japan, Canada and Australia.”
LSE shares dropped 4 percent to 1,288 pence, the biggest decline since Sept. 28, paring the gain in the last six months to 28 percent. The volume of shares traded was more than three times the three-month daily average.
London Stock Exchange has agreed to pay 15 euros a share for a 60 percent stake in LCH.Clearnet. It originally offered 20 euros, lowering its offer on concern that European regulations will force the clearinghouse to boost capital by 300 million euros to 375 million euros. The transaction is awaiting approval from the U.K. regulator.
LCH applied for a license to operate in the Australian market, and bought International Derivatives Clearing Group LLC from Nasdaq OMX Group Inc. and other investors. LCH is also in talks with Singapore Exchange Ltd., as the operator of Southeast Asia’s biggest stock market seeks to take a stake, according to three people familiar with the negotiations.
LCH is also introducing new over-the-counter services, including one for foreign exchange, and negotiating new rules as regulators around the world seek to push more trading onto clearinghouses following the financial crisis.