The London Stock Exchange Group is far from being the world’s biggest operator of financial markets, but neither is it a tiddler. So it seems amazing for such a long-established business that as recently as the middle of the last decade takeover bids were being valued at less than £2 billion.
Today it is worth more than £15 billion and the rise in the share price is one of the reasons why many investors were so strongly opposed to the decision to dump Xavier Rolet as its chief executive last year.
The acrimony surrounding Mr Rolet’s departure seems to have eased , with Donald Brydon, the chairman, appointing David Schwimmer, the former Goldman Sachs executive, as the exchange’s new boss this month.
Mr Rolet has left behind a business that, despite the upset caused last year by an aborted merger with Deutsche Börse, remains a top-class operation. A trading statement yesterday showed that it was in robust health and had benefited from the market volatility that caused share prices to swing wildly in February. A disconcerting period for investors was hugely helpful for the LSE, which makes more money as trading volumes rise.
The business has been transformed from an old-fashioned exchange into a far broader operation that now resembles a financial data and technology company. A quick skim of the initiatives under way highlights this point. From the end of this month, the LSE’s Curve Global business, an interest rates derivates platform, will begin offering a Bank of England-backed alternative to Libor, the interbank lending interest rate. The LSE is also increasing its ties with the Hong Kong stock exchange, including working together on an IT upgrade that will make its systems faster and more resilient.
Furthermore, the exchange has tightened its grip on LCH Group, its clearing operation, by increasing its stake in the business by 2 per cent to 68 per cent.
Mr Rolet’s acquisitive streak had led to questions about the financial strain that he was putting on the business, with leverage reaching a peak in December 2014 of 3.8 times earnings before debt, interest, tax, depreciation and amortisation. However, a report from Moody’s last month said that recent deleveraging left few concerns over the sustainability of this debt pile.
Indeed, the LSE said that its present committed lending facilities offered headroom of more than £750 million. Analysts at RBC Capital Markets said that there was £900 million of spare capacity that could be used either to juice investors’ returns or to fund further acquisitions.
Nevertheless, while the exchange is a far sturdier business than it was even a decade ago, it still looks relatively small compared with American rivals such as the Chicago Mercantile Exchange and ICE, which boast pre-tax income more than three times its own. This means that the potential for an American bid for the LSE remains a highly likely prospect. Some analysts speculated that appointing Mr Schwimmer, who has a background in advisory business, as chief executive was a tacit admission that such skills may come in handy.
The Chicago Mercantile Exchange’s recent deal to buy Nex Group, a London-listed electronic broking and data business, suggests that interest in Britain remains undimmed and potentially gives ICE a clearer run at the LSE should it rekindle its interest.
As a unique asset, the LSE will always be attractive to potential buyers. For investors, its income stream means that even if an offer were to come later rather than sooner, the shares remain attractive.
ADVICE Buy
WHY The exchange remains a highly attractive asset to many potential bidders
Astrazeneca
The latest cancer trial results from Astrazeneca were disappointing for the company and for science, but were greeted largely with a shrug in the City.
The Cambridge-based company unveiled the phase III results of its Arctic trial, which has been studying a combination of two drugs — durvalumab, an existing product, and tremelimumab, an experimental drug — in patients with metastatic non-small cell lung cancer. Taken together, they failed to slow the disease or extend life in patients who had already received at least two previous treatments. Expectations of success had been low, however, and the shares retreated only 31p, 0.6 per cent, to £49.84.
Indeed, Astrazeneca accentuated the positives of the trial, specifically that durvalumab on its own showed a “clinically meaningful reduction in the risk of death compared with chemotherapy”.
Combining two so-called immunotherapy drugs, where the medicines harness the immune system to fight tumours, was seen as one of the most promising scientific frontiers, but hopes have been receding. They were dealt a particularly big blow last July when Mystic, a separate study by Astrazeneca testing a combination of the drugs as a first-line lung cancer treatment, demonstrated a failure to slow progression.
Cancer treatments, particularly lung cancer, have been a key area of research and development for Astrazeneca. It has been an important contributor to attempts to return the company to sales growth after suffering a costly patent cliff in 2012 that hammered its revenues. Astra has made progress elsewhere in its pipeline, however, including a flurry of positive regulatory and clinical results, and that has helped to rebuild confidence in its attempts to replenish its drugs cabinet. Such progress was underlined last February when the company forecast that it would return to product sales growth for the first time in four years.
Questions remain, though, including over whether its shares will return to the £55 level that Pfizer, an American rival, offered in a contentious takeover approach four years ago.
ADVICE Hold
WHY Drugs pipeline progress and industry consolidating