LONDON (Dow Jones)--London Stock Exchange Group PLC (LSE.LN) said Monday that it will buy the remaining 50% stake in FTSE International Ltd. that it doesn't already own from Pearson PLC (PSO) for GBP450 million in cash ($705.2 million) as part of broader moves to diversify.
The move highlights the aggressive way in which the LSE is growing its business through acquisitions. Over the past two years, it has acquired Turquoise, an erstwhile competitor in European share trading, as well as Sri Lankan technology provider MillenniumIT.
Earlier this year, the LSE failed in its effort to acquire Canada's TMX Group Inc (X.T), operator of the Toronto Stock Exchange, but is currently in talks to buy a stake in clearing house LCH.Clearnet Group Ltd. and has been reported to be interested in buying a stake in the London Metal Exchange.
LSE Chief Executive Xavier Rolet was upbeat about taking full ownership of the index business, which it has jointly owned with Pearson for 16 years. "This transaction further delivers on our diversification strategy, expanding LSEG's existing offering deeper into indices, derivatives and market-data products and services."
"Immediately earnings-enhancing, we expect this transaction to create long-term value and growth for our customers and shareholders," Rolet said in a statement.
The FTSE 100 index was first calculated by a team within the LSE in 1984. That small team was spun off into a joint venture between the LSE and Pearson in 1995.
Pearson--which sold its 61% stake in financial market data provider Interactive Data Corp. for $2 billion before tax last year in May--said the LSE deal will strengthen the group's "focus on global business news, analysis and intelligence, increasingly delivered through subscription models and digital channels." It marks the publisher's exit from companies that are primarily providers of financial data.
Pearson CEO Marjorie Scardino said the LSE deal further strengthens the group's "financial position at a time of significant macroeconomic turbulence."
"We are freeing up capital for continued investment in a proven strategy: becoming more digital, more international and more service-oriented in education, business information and consumer publishing," she said in a separate statement.
The U.K.-based company--which has extensive educational publishing operations and publishes the Financial Times newspaper and Penguin books-- plans to use the LSE sale proceeds "to support and accelerate its strategy, investing in its businesses both organically and through acquisitions of companies with complementary content, technology and geographic exposure."
Pearson has made several bolt-on acquisitions over the past 18 months or so, aimed at strengthening its education operations.
Pearson said it expects FTSE to make a total post-tax contribution to its adjusted earnings of approximately GBP18 million, or 2.2 pence a share, in 2011.
The LSE said it will pay for its acquisition using surplus cash and debt, and also said it has secured another GBP350 million in loan commitments from banks for "financial flexibility." This raises the LSE's debt level of about 0.7 times earnings before interest, taxes, depreciation, and amortization, or Ebitda, to 1.6 times.
LSE Director of Information Services David Lester told Dow Jones Newswires that the LSE is "comfortable" with its higher level of debt and that it won't hamper any possible future acquisitions.
"We're comfortable with going even beyond two times if there is a right opportunity, though we've consistently said that between one and two times is a comfortable range for us," Lester said.
"We will always be looking for the right opportunities and if they come along, we will look at our finances, and we'll make sure that we can participate if needs be," Lester said.
At 1151 GMT, LSE shares were down 4.4% at 784 pence, while the FTSE 100 index was down 0.5%.
Barclays Capital analyst Daniel Garrod said: "We believe this makes good strategic sense, is immediately earnings-accretive and is consistent with previous strategy to expand information services."
Garrod kept his equal-weight rating and 925 pence target price on the stock.
Royal Bank of Scotland analyst Paul Gooden said Pearson "looks like they've got a very good price" for the divestment.
LSE's Lester said the company was paying for the future growth of FTSE, noting FTSE has grown its Ebitda by an average of 22% over the past five years and is forecast to grow its 2010 Ebitda of GBP40 million by 30% in 2011.
The LSE said it expects cost synergies of GBP10 million annually and gross revenue synergies of GBP18 million annually by the end of the third year of full ownership of the FTSE.
Under the terms of the agreement, the LSE will continue to use the FTSE name. The transaction is expected to close by the first quarter of 2012.
-By Vladimir Guevarra, Dow Jones Newswires. Tel. +44 (0) 2078429486, firstname.lastname@example.org