Analysts point to gap between the tabled offer and LSE's valuation, writesChris Hughes
Nasdaq would have to take a very rosy view of the London Stock Exchange's prospects to justify raising its £2.7 billion (€4 billion) takeover bid to a level that the UK exchange might recommend, analysts said yesterday.
Moreover, Nasdaq has only limited financial headroom to increase its offer without also having to raise cash through issuing stock to its existing shareholders.
The LSE has said that Nasdaq's £12.43-a-share offer "substantially undervalues" the company and "fails to reflect its unique strategic position and the powerful earnings and operational momentum of the business".
Taken at face value, this would suggest that the board thinks the LSE is worth at least £12.43 a share on a standalone basis - and should command a premium on top. As a rule of thumb, takeover premiums are about 30 per cent. On that basis, Nasdaq might have to offer between £16 and £17 a share to win over the LSE board.
On paper, Nasdaq could almost certainly fund a raised offer.
As things stand, it needs to find £1.9 billion to pay for the 71 per cent of the LSE that it does not already own. Factor in Nasdaq's existing net debt and the LSE debt that Nasdaq would assume, and this implies Nasdaq would be left with $4.7 billion (€3.66 billion) of debt upon completion of a transaction. Tweak the bid up to £13 a share, and the debt burden equates to 6.9 times forecast combined earnings before interest, tax, depreciation and amortisation (ebitda) in 2007, with interest cover of 2.6 times, according to research by Fox-Pitt.
But at £17 a share, net debt to ebitda rises to a multiple of 8.1 with ebitda to interest of just 2.1 times.
This would make for a highly leveraged deal, and even then the multiples are based on forecasts of strong earnings growth at Nasdaq next year.
Is such a deal feasible without destroying value? Only on the most optimistic assumptions, according to Andrew Mitchell of Fox-Pitt Kelton.
"A bid at £17 a share would leave nothing on the table for Nasdaq's shareholders. For it not to destroy value, you would have to make some extremely aggressive assumptions about the sort of volume growth you could achieve," he said.
One such assumption would be if trading activity in London rose to the levels seen on the Nasdaq market. If so, Mr Mitchell estimated that the LSE could be worth as much as £14.40 a share on a standalone basis.
On top of that, he estimated that synergies from the deal would be worth about £2 a share.
"A bid around the current price would leave some margin for error, plus upside if things go [ Nasdaq's] way," Mr Mitchell said.
Katrina Preston of Bridgewell Securities said: "It's really impossible to take a scientific approach to the goodwill.
"[ The LSE] is a unique asset that has a very high strategic value to another exchange. It would be surprising if the board was prepared to recommend anything much less than £15 a share." - (Financial Times service)
