Credit Suisse ups LSE target price as potential bidding war looms

Credit Suisse upped its target on London Stock Exchange to 3,350p from 2,900p to reflect the value of cost synergies accruing to LSE shareholders from the proposed merger with Deutsche Boerse on its estimates.

The bank retained its ‘outperform’ rating on the stock, pointing to the potential for further upside to the target price in the event of a superior counterbid.

“The proposed merger between LSE and DB1 and a subsequent announcement from ICE that it is considering a counterbid for LSE serve as timely reminders of the strategic logic of exchange consolidation,” it said.

CS said what makes LSE particularly appealing is that its majority-owned clearing house, LCH Clearnet, has a key role in determining the long-term winner in European futures markets.

“For this reason, the owners of Europe's two largest futures exchanges (DB1/ICE) could battle for control.”

The bank said that with LSE shares trading at a 10% premium to the Deutsche Boerse merger terms, market participants have high expectations of a better counterbid.

CS reckons Deutsche Boerse can up its game by including a cash sweetener but said this would rule out a nil premium all share merger-of-equals and assumes the ratings agencies will relax a gross leverage ceiling of 1.5x which currently applies to DB1 at a group level.

The bank said that if a bidding war materialises, this may lead to a re-appraisal of strategic options for other European market infrastructure providers and further consolidation is a possibility.

“Our preferred way to play this is via ICAP which we believe is most significantly undervalued in a takeout scenario. While DB1 could become a target itself, domestic government opposition to a takeover remains a significant hurdle in our view.”

At 1020 GMT, LSE shares were down 1.3% to 2,817p.