Shareholders of LCH.Clearnet have voted overwhelmingly in favour of adopting the equity redemption plan proposed by the clearing house’s board at the end of September.
The decision brings to an end a year of uncertainty about the company’s future, which has included takeover approaches by US clearing firm the Depository Trust and Clearing Corp and by a consortium of banks led by Icap, the interdealer broker. The result will be a structure in which ownership of LCH.Clearnet is aligned more closely with its customer base than before, but control is kept in Europe and does not pass to a narrow clique of bulge bracket firms.
A spokesperson for LCH.Clearnet confirmed that 97% of the shareholders that took part in the vote on October 14 supported the plan.
LCH.Clearnet chairman Chris Tupker, who is due to leave by the end of 2009, said in a statement: “A further alignment of users and owners should enable us to respond better to new clearing opportunities and make it easier to counter competitive pressures by reducing fees.”
The clearing house will buy and retire up to 33.3m of its own shares for €10 a share, in a deal that could total as much as €444m including a special dividend of €1.50 a share, worth €111m, paid to all shareholders.
Euroclear, largest of LCH.Clearnet’s 119 shareholders with 15.8%, said as soon as the deal was mooted that it would surrender all of its 11.7m shares. A further 73.3% of the company is owned by users and 10.9% by exchanges.
Shareholders have until October 20 to decide how many shares, if any, to tender for redemption. On October 26, LCH.Clearnet will advise surrendering parties whether all their demand can be met.
“The voluntary redemption is intended to give shareholders who will not benefit from reduced fees the opportunity to sell some or all of their shareholding in the company,” Tupker said. “This increased alignment of users and ownership will enable us to deliver the most effective long term clearing solutions to users and the markets we serve.”
LCH said it expected to be owned “predominantly by users of its services and exchanges which have a clearing relationship with the company”.
A year-long struggle
The third option of an internal restructuring of LCH.Clearnet first emerged in February as a rumour reported in the press.
It appeared to be a defence by the LCH.Clearnet management, which was on the back foot after the solution it had first proposed the previous October – an agreed takeover by DTCC for €739m or €10 a share – had failed to win shareholders’ support.
DTCC and LCH missed their own March 15 deadline for agreeing detailed merger terms, and on April 29 DTCC said it was reluctantly walking away.
Nearly all the players involved were loath to discuss their views of the struggle, but by February a cluster of financial institutions had begun to gather around Icap in opposition to the DTCC deal.
Icap was widely thought to want a share of the clearing pie as the financial crisis swung opinion in political, regulatory and market circles sharply in favour of centrally cleared derivatives and against the pure OTC market that had been one of Icap’s main hunting grounds. The bid, dubbed Project Lily, was expected to be worth €11 a share.
Icap’s backers eventually included 10 firms with seats on the LCH.Clearnet board: the London Metal Exchange, Deutsche Bank, JP Morgan, Morgan Stanley, BNP Paribas, Société Générale, Royal Bank of Scotland, HSBC, Barclays and Citigroup.
Even though those firms set up Chinese walls between officials involved with the potential consortium bid and those who sat on the LCH board, it seemed highly unlikely that an LCH.Clearnet board full of employees of banks backing the Icap bid would approve the DTCC merger.
In May it seemed the way was clear for Icap, and indeed a formal offer was made on May 8. But then the momentum slackened.
Icap runs out of steam
Garry Jones, global head of derivatives at NYSE Euronext, another LCH shareholder, made his opposition to the Icap bid clear, politely but firmly, on May 27. He said it would not serve “the best interest of the market as a whole” for ownership of the clearing house to move to “a narrow group of shareholders”.
Very few market participants spoke out in this way, but other shareholders may have felt similarly.
The London Stock Exchange, which also uses and part-owns LCH.Clearnet, told FOW in May that it was not in the consortium, though press reports had said it was.
Since then, less and less has been heard about Icap. LCH’s management appeared to regain the initiative, with a string of user-friendly announcements including fee cuts and opening SwapClear, its highly successful interest rate swap clearing service, to buyside firms.
Gradually the internal restructuring gained ground. At first the plan was thought to involve buying out the clearing house’s shareholders and selling the company back to them.
The proposal that has now been accepted appears more modest and manageable. It allows shareholders that want to give up their stakes to do so, getting as much cash – including the special dividend – as they would have from Icap.
Yet shareholders that want to stay in can do that, and will get the sweetener of the dividend. Euroclear bows out gracefully as a shareholder, leaving LCH entirely in the hands of its users, including the exchanges.