LSE's bid for Refinitiv spotlights quest for data, globality

© Reuters. An advertisement for Refinitiv is seen on a screen in London's Canary Wharf financial centre

By Huw Jones and Elizabeth Dilts

LONDON/NEW YORK (Reuters) - London Stock Exchange Group Plc's (L:LSE) planned purchase of Refinitiv in a $27 billion deal is the latest sign that exchange operators are focusing more on data products to increase revenue, while also trying to expand their global reach.

For more than a decade, exchange operators around the globe have been trying to consolidate. But proposed tie-ups between major competitors have failed several times in the past because of resistance from government authorities who either had antitrust concerns or did not want a foreign company running what was often seen as a national symbol.

At the same time, profits from the traditional business of facilitating transactions like stock trades have fallen, pushing the industry to look for related businesses for growth, analysts and industry sources said.

Because revenue from data products has been rising and is expected to continue doing so, exchanges are now hungry for these products as well as selling services based off that data and information, such as indexes and fee-based services they can offer once a trade has cleared.

"Data is the lifeblood of financial markets today now more than ever - and that data is getting more and more valuable," said Kevin McPartland, head of market structure and technology research at Greenwich Associates.

If completed, LSE's deal to buy Refinitiv, a global financial data analytics provider, from buyout firm Blackstone Group Inc (N:BX) and Thomson Reuters Corp (TO:TRI) will fit that mold, the analysts said.

"It just makes them more competitive and more appealing as a partner for customers because it brings together a lot more than what LSE had before," said Spencer Mindlin, an Aite Group analyst who focuses on capital markets trading technology.

LSE and Thomson Reuters declined to comment for this article, referring to their earlier statements that confirmed they were in discussions for a deal. Blackstone did not have an immediate comment.

In its statement, LSE said a deal would help expand its data and distribution capabilities, diversify trading capabilities and increase global footprint, allowing it to benefit from "future data- and technology-enabled growth opportunities."

LSE said it expects to cut more than 350 million pounds in annual costs for five years after the deal closes, and add to its earnings per share in the first full year after completion.

GLOBAL EXPANSION

Refinitiv is based in London and reaches more than 40,000 clients, who are largely traders and investment professionals, in more than 190 countries.

Patrick Young, an industry consultant at Exchange Invest, said LSE's deal for Refinitiv would be "a major pivot away from the EU" for the exchange operator.

Just last month, London Stock Exchange Chief Executive David Schwimmer said it was difficult even to consider big mergers because of political opposition.

The company failed several times to merge with Germany's Deutsche Boerse (DE:DB1Gn) AG (GDAXI) and previously failed to acquire Canada's main exchange, TSX Inc.

Those collapsed deals mirror proposed cross-border marriages that didn't work, including Singapore Exchange Ltd's (SI:SGXL) attempt to buy Australia's ASX Ltd (AX:ASX) in 2011.

QUEST TO DIVERSIFY

Major exchanges, including Intercontinental Exchange Inc (N:ICE), Nasdaq Inc (O:NDAQ) and Deutsche Boerse, have been more successful in inking smaller deals that diversify their businesses away from basic stock trading.

The most basic services that exchanges provide are real-time market data feeds. In the United States, that generates about $1.4 billion in annual revenue for the industry, according to Greenwich Associates. Exchanges generate billions more in data revenue beyond that for related products and services.

Investors and banks that pay for the information have been pushing back on pricing. Some investment firms have called on the European Union's markets watchdog ESMA to review market data fees, saying they keep on rising despite falling costs of computing and data storage.

At London Stock Exchange, former chief executive Xavier Rolet began to diversify revenue after taking the helm in 2009.

Today, information services account for nearly 40% of the group's 2.14 billion pounds ($2.65 billion) in annual revenues, according to its 2018 annual report. That portion is followed by post-trade services at just over one-third.

Traditional capital markets business like stock trading and initial public offerings accounted for just 19% of revenue last year, compared with around 46% a decade ago.

(This story corrects paragraph 19 to replace reference to "consolidated market feeds" with "real-time market data feeds").