(Pictured: Xavier Rolet)
Shortly after the London Stock Exchange Group announced its heads of agreement to acquire Russell Investments, the LSE’s chief executive and chief finance officer fronted UK analysts. The questions about Russell’s investment management and consulting businesses were unrelenting.
If the analysts are to be believed, LSE is unlikely to retain the non-index part of Russell for very long. LSE is to conduct a “comprehensive review” of investment management to “determine its position and fit” within the group. The review will take up until about the time the US$2.7 billion deal is expected to be completed, either late this year or early next year.
While Xavier Rolet, the CEO, and David Warren, the CFO, did not deviate far from their script, it appeared the analysts believed the lack of synergies between LSE’s index business and Russell’s investment management divisions and the way the funding for the takeover had been structured, indicate a near-term on-sale is likely.
First question: With the investment management business, are there parts of it, other than manufacturing, which fit better with LSE’s business, such as implementations solutions?
Answer: We are not in a position to make a comment ahead of the review. Russell does have a highly successful transition business and implementation business…
Second question: You flagged funding the asset management business from debt and the index business from debt and equity, this implies your thinking… Do you really see yourself as an asset manager in five years time?
Answer: We’re not in a position to make decisions. It is a financing structure we have used in the past. We will maintain our current investment grade ratings.
Third question: What is the probability of the likelihood of you retaining the asset management business? Is it more or less likely?
Answer: I have to give you the same answer as before…
And so the questioning went on for about 30 minutes, according to an audio record on the LSE website from June 26, when the deal was announced.
LSE has put a value of $1.1 billion on the asset management business, including the multi-asset funds, implementation, transitions and consulting, compared with $1.7 billion on the index business. The index business will be funded through a rights issue and some debt. The asset management business will be funded by debt only.
The deal will push LSE beyond its normal leverage range of between one and two times retained earnings but Rolet told the analysts the aim was to get this below two times and operate comfortably in the one-to-two times range.
One analyst asked that, given the asset management business had earnings of about $150 million, why was the implied valuation of $1.1 billion so low? Rolet replied that LSE had not given such information about the valuation. “I will leave it up to the Street to make its estimates,” he said.
The takeover makes LSE the second-largest index provider in the world, after MSCI, with $9.2 trillion benchmarked to its indices. It will also be the second-largest ETF player in the world.
The asset management arm has $256 billion in funds under management and $2.4 trillion under advice.