By Daisy Ku
LONDON (Reuters UK) - Shares in London Stock Exchange (LSE) hit their lowest level for more than two years this week as competitive pressures on the stock grow stronger and the prospects of a takeover dim.
The arrival of new entrants to the exchanges sector means a tough future not only for the LSE itself, but also for those who were considering a buyout only months ago.
In the coming three months, Turquoise, a trading venture backed by nine big investment banks, and Nasdaq OMX Group's (NDAQ) pan-European market will be up and running and will be vying with the British exchange for equities trading fees.
"Competition is coming in," said Fox-Pitt Kelton analyst Andrew Mitchell. "There is much greater uncertainty on valuations, inhibiting M&A."
Only nine months ago LSE shareholders were enjoying a Middle Eastern bidding war for the exchange's shares.
But since January, LSE shares have plummeted almost 58 percent from their all-time high of more than 2000 pence, underperforming a 11.2 percent drop by the FTSE 100 over the same period.
The shares hit 842.5 pence on Thursday, their lowest level since March 2006, putting them on a price/earnings ratio of 11.4 times 2009 forecast earnings -- below the trough multiple seen in 2003.
Investors fear they could yet fall further, as investment banks continue to deleverage and as existing shareholders sell their positions in order to offset the pinches of the credit crunch.
Borse Dubai, for example, has been funding its 805 million pound investment by debt, has not ruled out selling some of its 20.6 percent stake in the LSE.
The emirate, which acquired 56.9 million LSE shares at 1414 pence from Nasdaq when it took part in a three-way merger with Nordic exchange OMX in September, is sitting on a paper loss of 314 million pounds.
And following Monte dei Paschi di Siena's sale of its 2.9 percent stake in the LSE in November, other Italian banks might cash out, given the capital pressure European banks are facing.
Bernstein Research analyst Dirk Hoffmann-Becking expects potential bids from transatlantic exchange group Nasdaq OMX and NYSE Euronext (NYX)(NYX) may yet happen, but both bourses are preoccupied by the need to focus on integration after a raft of deals.
Other exchanges have share price problems of their own.
Shares in Nasdaq and NYSE Euronext have both fallen by about 37 percent so far this year, while the Deutshce Boerse (DB1Gn), which offered a 530 pence per share all-cash bid for LSE in December 2004, has seen its shares fall almost 40 percent.
One shareholder which might be yet be willing to raise its stake is the Qatari Investment Authority, which is sitting on a paper loss of about 301 million pounds after buying 41.7 million shares at 1,585 pence each in September, and which could increase its stake.
But the emirate, which has invited LSE Chairman Chris Gibson-Smith to be a director of the Qatar Financial Centre Authority, is more interested in getting the help of the bourse to develop its own market than in launching a hostile bid, LSE insiders say.
Either way, potential bidders say they are unlikely to be tempted by the current share price.
"Should LSE fall below 500p, of course we would be interested. But at current level, no, thank you," said an executive of one exchange.
Key LSE shareholders:
Borse Dubai 20.4%
QIA 15.1%
Kinetics 10.9%
Unicredito 5.9%
Intesa Sanpaolo 5.3%
Legal & General 3.0%
*Source: The LSE annual report 2008
(Editing by Andrew Callus)
