LSE and LCH.Clearnet: yet another delay

Tuesday, December 4, 2012 4:12 AM

31 October... TBC... 7 December.... Now, 14 December. The decision timeline keeps getting pushed back. The next steps in the LSE’s bid to control LCH.Clearnet hinge on this ruling from the Office of Fair Trading, so what’s driving the delay?

Could it be that the OFT wants to establish what the transaction will actually be? The last time around (with their Turquoise purchase) LSE executives told another government branch (the judiciary - you know, the one where you swear to tell the truth) that they implemented a deal different to the one that was approved. Smarting from the implied insult (if not the ignominy of irrelevance), OFT officials examining the LCH deal may want to nail down some real commitments from the LSE to avoid allowing a repeat performance.

Maybe, but cold feet seems a more likely explanation.

Is the LSE trying to weasel out of the deal they agreed? After all, according to press accounts at the time, the LSE valued LCH at twice what the next bidder deemed the right price. Then it became clear that major customers were going to flee, including at least two (London Metals Exchange and NYSE Euronext) who would use the proceeds of the sale to establish platforms to rival LCH. And then regulators chimed in to say the clearing house needed higher capital reserves, which made the business a much less attractive acquisition target.

The problem for the LSE is that they’re in a Lose-Lose situation. If they “win” approval for the deal and complete the purchase, they’ll be saddled with an asset that’s costlier than the one they had hoped to carry. And if the OFT scuppers the deal, LCH sellers will be furious that the process dragged out so long while the value of their asset sank under the weight of the LSE’s ineptitude.

The angriest sellers will be the banks, who will resent the timing of the deal’s collapse, coming as it would on the cusp of bonus season when executives will have already claimed the windfall sale as part of this year’s comp. Make no mistake, if this deal dies LSE chief Rolet will be in serious trouble with the LSE’s major customers who will not sit quietly the next time he drones on about the “partnership” business model he has tried to engineer with banks.

Given the damned-either-way situation of their own making, the LSE probably hopes the OFT does derail the deal. Then management could pass off their (latest) failure as all the fault of the authorities. “We really wanted the deal,” they’ll say, unconvincingly, with the disingenuousness of the jilted suitor who’s secretly relieved. But this outcome has major pitfalls, even larger than the banks’ scorn: critics will line up to lambast the LSE for failing again at the alter, coming on the heels of their enormous (and still mysterious) failure to close the TMX deal.

In any event, it really is quite amazing that the story hasn’t gotten more coverage from the London financial press. With very high stakes and a group of sellers who leak like sieves, it’s hard to see why the story seems buried until the holidays. Unless, that is, The City plans to stage the whole event as a panto, which would seem remarkably appropriate, if also a bit too easy to cast.

Up next: The LSE’s retail bond deal: why shareholders should sharpen their pencils, and then their knives.