London Stock Exchange Group Plc agreed to buy Frank Russell Co., a unit of Northwestern Mutual Life Insurance Co., for $2.7 billion to bolster its FTSE International Ltd. business.
LSE will pay for the acquisition with a rights issue of $1.6 billion and finance the rest with new and existing debt, according to a statement. The exchange said the takeover will boost earnings in the first full year. The shares jumped 6.1 percent, the most since July 2013, to 1,984 pence today.
The purchase will help LSE expand its index and exchange-traded fund businesses, the company said. LSE, which has trailed rivals such as Deutsche Boerse AG in providing derivatives to investors, bought the 50 percent of FTSE International that it didn’t already own in December 2011.
“This is a strong strategic acquisition for the group, which creates a highly valuable leading indices business with significant growth potential,” Xavier Rolet, chief executive officer of the exchange, said on a call with journalists today. “It will accelerate the group’s global expansion, especially in the all important U.S. market, while delivering financial benefits for the group.”
Russell, founded in 1936 and based in Seattle, owns an index division that operates equity benchmark gauges such as the Russell 2000 Index and a money manager that has $257 billion in assets. It competes with other index providers, such as S&P Dow Jones Indices LLC and MSCI Inc. Owning an index operator makes it easier to provide futures and options contracts based on different gauges.
“North America is a relatively tough market to break in the data space, hence FTSE on its own would struggle to take on much larger players such as S&P or MSCI,” Virginie O’Shea, a senior analyst at Aite Group LLC in London, wrote in an e-mail. “Combining its assets with Russell, on the other hand, should give it a fighting chance to achieve this in future.”
The evolution of market structure and regulations such as the Markets in Financial Instruments Directive, currently in a consultation phase for being revamped, have challenged incumbent exchanges’ business models, bringing them to diversify into other areas, O’Shea said. The acquisition of Russell will help the London-based exchange diversify in the three core areas of capital formation, post-trade services and intellectual property, according to Rolet.
The purchase will be finalized later this year, pending regulatory and shareholder approvals, according to a Northwestern Mutual statement. LSE said it expects to start the rights issue in September 2014, following shareholders’ approval.
Barclays Plc, Greenhill & Co., Peter J. Solomon Co., RBC Capital Markets and Robey Warshaw LLP advised LSE on the transaction, according to the LSE statement. Goldman Sachs Group Inc. and JPMorgan Chase & Co. advised Northwestern Mutual, its statement showed.