LSE, DB, Euronext: transformed market operators

London Stock Exchange controls the London market place, Deutsche Börse Germany while Euronext controls the rest of Western Europe, in particular the very dynamic Amsterdam market place but also the Belgian, French, Italian, Irish, Norwegian and Portuguese (small markets of course, but there is strength in numbers and allows for economies of scale).

Although the three stock market operators each follow a different strategy, they have in common that they present an excellent financial profile and an unassailable competitive advantage: being THE place where supply and demand materialize and counting institutional clients weighing several hundred of billions. Moreover, the market place business model remains extraordinarily attractive and reminds us of an old adage: the best way to get rich at the casino is not to play there but to own the casino.

On the other hand, in recent years, each of these three groups has had to face the same imperative: to emancipate itself as much as possible from trading activities on the equity and credit markets, markets on which commissions are increasingly meager due to technological progress, the democratization of finance and competitiveness. To achieve this, these three groups followed different paths.

  • LSE went all out on data with the mega-acquisition of Refinitiv last year. The recently integrated segment now represents 3/4 of its turnover and almost all of its profits. Beyond being a financial market operator (the London market has also lost pace and activity to the benefit of New York and Amsterdam), LSE is becoming more of a specialist in financial data like Moody’s, FactSet, S&P and of course Bloomberg (which is not listed) – more relevant comparables than DB or Euronext in reality. The data business is the golden goose: high margins, recurring, deindexed from transaction volumes, that is to say an excellent business in itself. The transformation bet made by LSE is daring, it is a real reinvention.
  • DB for its part has chosen to specialize in derivatives, a market with substantial volumes and where the margins are much higher than those operating on the traditional equity and credit markets. From now on DB is the benchmark operator for the European futures and options market. Note that these derivatives are not only used for speculative purposes, they are essential in all industries to hedge against different types of risk (rates, FX or commodities for example). This derivatives business is a natural complement to its expertise in clearing and settlement services through its subsidiary Clearstream. Another strategic choice that seems to make sense.
  • Under the impetus of its excellent CEO Stéphane Boujnah, Euronext has opted for a more traditional strategy almost entirely oriented towards external growth by acquiring the various stock exchanges in Western Europe one after the other, thus multiplying its turnover of business and its profit by 3 in 7 years. Trading activities in equities and credit instruments still account for the lion’s share (more than 1/3 of turnover) but the business mix remains well diversified (1/4 of turnover in clearing/settlement, 1/4 in listing, technology and data services). Moreover, with its pan-European scale, Euronext is able to offset the otherwise very low transactional margins through volumes. I repeat myself, this is certainly a “traditional” strategy but one that makes a lot of sense and makes it possible to clearly distinguish Euronext from LSE and DB.

Euronext’s vulnerability is its greater exposure to transaction volumes, which is also the cause of its relative undervaluation compared to its peers. The group’s shares are currently trading at less than x15 cash profits while those of DB and LSE are both at x20. This also shows that the market anticipates a cooling in the financial markets (fear of recession, etc.) after an altogether euphoric decade.

This leads us to say that contrarian investors could well be interested in Euronext, which has become a de facto monopoly with control of the stock exchanges in Western Europe, and which in reality remains an excellent business (business model of the “toll on the bridge”). It often makes sense to invest in higher quality businesses when they are going through a slump in the economy… In any case, a situation to be watched very closely.

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