When London Stock Exchange Group shelled out €1.6 billion for Borsa Italiana in 2007, analysts applauded the deal for giving it access to one of the most active share-dealing markets in Europe (Miles Costello writes). How times have changed. Last week’s move in the opposite direction, to offload Borsa Italiana to its pan-European rival Euronext, was seen as a similarly positive step, in this case making it easier for European regulators to wave through LSE Group’s acquisition of Refinitiv, the financial information provider.
London Stock Exchange Group was founded as a market for trading stocks in 1571. It has long played an active part in the consolidation of international securities markets and as well as Borsa Italiana, it owns a majority stake in MTS, a European fixed-income market, and Turquoise, the pan-European share-trading system. In addition, as well as facilitating securities trades and new company listings, it also provides data, custody and risk management services and publishes stock market indices.
It may be better known for its capital markets activities, but it makes more money from the information it provides, along with humdrum back-office work such as clearing share purchases and sales. It is a member of the FTSE 100 index with a market value of more than £31 billion and in its most recent financial year it made a profit before tax of £651 million on revenues of just over £2 billion.
The disposal of Borsa Italiana, which also includes a 62.53 per cent stake in MTS, CC&G, the Italian clearer, and Monte Titoli, the custody and settlement business, looks very tidy for several reasons, not least the price tag of €4.325 billion, which seems attractive, equating to 16.7 times Borsa Italiana’s adjusted earnings last year and 21.6 times its pre-tax profit of €200 million.
LSE Group also has made the sale conditional on European regulators granting approval for its purchase of Refinitiv, the owner of the Eikon terminals used on trading floors, so it is able to back out if the decision doesn’t go its way. The proceeds of the sale will be used to cut some of the debts it will take on as a result of the $27 billion acquisition, which had been a worry for some analysts.
While the sale adds to Euronext’s heft as a giant in securities trading, the stock exchange would argue that Refinitiv, the ownership of which would help to create a worthy rival to the Bloomberg financial news and data group, is a bigger prize as information and analytics become an ever stronger force in dealing. Owning Refinitiv should help to make LSE Group’s earnings even less susceptible to the fluctuations in listings and trading and, because the terminals are subscription-based, increase its recurring revenues.
Because Euronext is working with two Italian lenders on the Borsa Italiana transaction, it also assuages any potential unease about ownership among governments and regulators. In short, if the sale goes through, everyone’s happy.
Shares in London Stock Exchange Group, down 104p, or 1.2 per cent, at £87.74 , are not cheap. They trade at about 43.5 times HSBC’s forecast earnings for next year, falling to a more manageable 30.2 times the bank’s estimates for 2022. At only 1 per cent, the dividend yield is extremely modest.
Nevertheless, those investors who followed this column’s “buy” recommendation in August last year will have seen their holding grow in value by 29 per cent. With the Refinitiv acquisition looking increasingly likely to go ahead, there is every reason to hold on.
ADVICE Hold
WHY Good terms for the sale of Borsa Italiana, which improves the chances of a beneficial acquisition of Refinitiv going ahead
Stock Spirits
Its drinks may be unpronounceable, but Stock Spirits Group is having no problem shifting brands such as Zoladkowa Gorzka and Dolnozemska in its core Polish and Czech markets (Dominic Walsh writes).
In a trading update for the year to September 30, the company said that its performance was ahead of its expectations. The Polish and Czech markets, together accounting for three quarters of its revenue, continued to show growth despite hits from excise tax increases and the coronavirus pandemic. Although Czech bars and restaurants were hit by a lockdown, this had the knock-on effect of boosting retail sales, while the shutdown was relaxed earlier than expected.
Volumes in Poland were up 2 per cent, with the Czech Republic up 5 per cent. Stock’s performance was helped by strong demand for flavoured vodka in Poland. Pricing, a thorny issue over the years, has been given a lift by the pandemic, with consumers accepting higher prices and retailers limiting promotions.
It is seven years since Stock Spirits Group, which takes its name from Lionello Stock, a Croatian who founded an Italian drinks distribution business in 1884, was listed on the London Stock Exchange, but its claim at the time to be a “mini-Diageo” has always sounded hollow, even after it signed a distribution deal with Diageo and another with Beam Suntory.
One issue that has dogged Stock ever since it floated has been tax, the cause of more than one profit warning over the years. Yesterday’s update noted the proposed introduction in Poland of a tax on small-format pack sizes of alcohol.
The other ever-present theme is that of acquisitions. Last year it completed two deals: Distillerie Franciacorta, an Italian producer of grappa and sparkling wine, and Bartida, an upmarket Czech spirits business. Stock said that it was now focusing on “more meaningful acquisition opportunities to deliver further shareholder value”.
The big question is whether the shares can secure a re-rating. Last night they closed up 12p, or 5.3 per cent, at 237p — 2p above the 235p that they were floated at in 2013.
ADVICE Buy
WHY Shares trade at 60 per cent discount to listed peers
