Debt weighs down bid for the LSE

Macquarie Bank's hostile bid for the London Stock Exchange would saddle the 307-year-old institution with the highest debt burden incurred in any European buyout.

The Australian bank says Dresdner Bank has agreed to lend £1.28 billion ($3.24 billion) to help pay for the £1.5 billion bid, which has been rejected by the LSE as derisory.

The takeover target's shares hit an all-time high yesterday after strong trading news from the company prompted forecast upgrades and expectations that any successful bid would have to be pitched much higher than the Macquarie offer.

Shares in the LSE reached 670p (compared with Macquarie's offer of 580p), valuing the market at £1.7 billion.

The LSE accompanied its rejection of the offer on Wednesday with a trading update showing a 16 per cent rise in revenues in the third quarter.

Analysts said this, coupled with the LSE's pledge in November to return £250 million in cash to shareholders if it remained independent, had prompted a re-evaluation of the company's growth outlook.

The debt Macquarie proposes is more than nine times estimated 2006 earnings. Johannes Thormann, an analyst at WestLB in Dusseldorf, said the debt costs might leave the LSE having to charge its customers more.

Exchanges such as the LSE are under pressure from investment-banking clients to cut fees.

"Leverage on this deal would be the highest we have seen so far in Europe," said Michelle De Angelis, an analyst at Fitch Ratings in London.

"Such high financial leverage must be supported by strong cashflow not only to support high interest payments, but to repay lenders."

- BLOOMBERG, REUTERS