The London Stock Exchange is topping the mid-cap risers after better than expected results, but investors are still awaiting the outcome of its $3bn merger with Canadian rival TMX.
LSE shares are up 29.5p at 848.5p after it reported a 22% rise in full year profits to £341m, assuaging fears of a slowdown as it loses market share to rivals such as Bats and Chi-X and giving a boost to chief executive Xavier Rolet's expansion strategy. Revenues rose 7%, with its main capital markets business down 5% but data services, technology and clearing all moving ahead. It has also filed for regulatory approval from Canadian authorities for the TMX deal, amid whispers of possible rival bids as exchanges around the world continue to consolidate. Rolet said:
We are fully focused on pursuing a range of growth opportunities which will remain pivotal to further progress in the year ahead.
The key for analysts at the moment seems to be the TMX deal. The LSE has targeted revenue synergies from the merger of £100m within five years, and analysts at Numis said if that happened the shares would certainly benefit. But they sounded a note of caution:
At 11 times historic earnings the LSE is not expensive but the key remains the TMX deal - should this go through and they can achieve just a fraction of the targeted synergies the LSE will be a buy.
The greatest risk remains that the Canadians do not believe the deal is a merger of equals and thus do not allow it to go through. In this scenario, a hold.
Karl Morris at KBW was also concerned about the possibility of the deal being blocked:
The shares have been weak lately so perhaps today's bounce [after the figures] is partly justified. We remain underperform however. The LSE/TMX merger proposal has met with resistance from important market participants in Canada, and the blocked SGX/ASX merger has provided an unpleasant nationalistic precedent (Australian Treasurer ruled that the deal was not in the interests of Australia). Furthermore, we do not believe the group's current rating is underpinned by near-term earnings growth potential, nor are we attracted by longer-term fundamentals on a standalone basis or in a post potential merger scenario.
