By Pamela Barbaglia and Clare Hutchison
LONDON (Reuters) - London Stock Exchange Group Plc is raising 938 million pounds ($1.6 billion) in its first rights issue of new stock to part fund the acquisition of U.S. indexes group Frank Russell.
Europe's oldest independent bourse unveiled plans to buy Frank Russell for $2.7 billion in June to move deeper into the U.S. financial services market, where half of global assets under management (AUM) are based. LSE said then it would help fund the purchase by issuing new shares.
The exchange said on Friday it would offer 74,347,813 new shares at 1,295 pence apiece, a 30.1 percent discount to their Aug. 21 closing price. Shareholders will have the right to buy three new shares for every 11 already held.
The deal gives LSE, owner of indexes business FTSE, third place in the booming market for exchange traded funds (ETFs), low-cost funds giving an alternative to active fund management, after market leaders S&P Dow Jones and MSCI.
The discount compares with a typical 30 to 40 percent range seen in similar recent UK deals, such as defence group Babcock's $1.8 billion rights issue, in which the shares were offered at a 34.5 percent discount, according to data compiled by Barclays.
David Warren, LSE's chief financial officer, said the size of the discount showed strong support for the Russell deal. "We have been in close contact with our major shareholders ... and there has been positive reception to the acquisition."
LSE shares closed 1.2 percent higher at 2,029p. The stock has risen more than 2 percent since details of the acquisition were given in June.
The deal, which is expected to boost earnings in the first full year after the merger, will create an index compiler with some $9.2 trillion of assets benchmarked against the performance of its market measures, which include the UK's FTSE 100.
Russell, founded in 1936 and based in Seattle, owns an index division that operates equity benchmark gauges, such as the Russell 2000 Index, and an investment management arm with assets under management of $279.7 billion.
Its revenue in the first six months was $875.2 million, up almost 12 percent year-on-year, while profit before tax more than doubled to $124.1 million, according to data released on Friday in the rights issue prospectus.
EARNINGS ESTIMATES
The document includes estimated earnings for the combined group, had the acquisition been completed on April 1, showing annual income at 2.2 billion pounds and profit at 194.8 million.
LSE is to integrate Russell into its information services division, but it will its retain its own brand.
Warren gave no update on LSE's plans for Russell's asset management arm. The company said in June it was working with Russell chief Len Brennan to determine its fit with the enlarged group. The review is expected to be completed around the time the transaction closes, expected at the end of the year. Brennan will then join LSE's executive committee.
LSE said it intends to continue paying dividends on a "progressive" basis after the Russell deal, with future payments adjusted to take account of the increased number of shares.
LSE also reported a 36 percent increase in operating profit to 102 million pounds in the three months through June, on revenue up 20 percent at 300 million.
Warren said the group had made a positive start to the year, seeing good trading in equities and fixed income in July, and so far in August. The number of new issues on its markets also rose in July from a year earlier.
The rights issue has been fully underwritten by Barclays, RBC Capital Markets, Deutsche Bank, JP Morgan Cazenove, Banca IMI, Banco Santander, HSBC and Mitsubishi UFJ Securities. It is due to complete by the end of September.
The new ordinary shares represent 27.3 percent of the existing share capital and would be 21.4 percent of the enlarged issued share capital, following the rights issue.
LSE will pay the remaining $1.1 billion for Frank Russell with existing bank debt facilities. It said the deal will leave it with net debt of 2.4 times core earnings or EBITDA, which it aims to cut to 2 times in the 12 months after completion.
(1 US dollar = 0.6028 British pound)
(Editing by David Clarke and David Holmes)