By Huw Jones and Ben Martin
LONDON (Reuters) - Bruised by the collapse of its merger with Deutsche Boerse (DE:DB1Gn) and battered by the abrupt departure of its CEO, the London Stock Exchange (LSE) (L:LSE) may find Brexit buys it time get its house in order.
The turbulence at the top of the 300-year-old City of London institution has triggered another round of speculation that large U.S. rivals such as ICE (N:ICE) or CME (O:CME) could become predators.
While London is Europe's biggest financial market, Britain is due to leave the European Union in just over a year's time and it is far from clear what trading relations it will have with the bloc when it comes to cross-border financial services.
"I see (a bid from a U.S. rival) as doubtful as ICE especially, in my eyes, wants to see more substance on Brexit negotiations before pulling their cheque book out," said a top-20 LSE shareholder, who declined to be named.
What's more, while the London exchange's LCH division dominates the clearing of financial contracts in euros now, some EU policymakers insist the business should move within the currency bloc once Britain quits the EU.
"For anyone stepping in and thinking about acquiring the LSE, the big risk for them is Brexit," said an analyst at an investment bank, who added that LSE shares looked expensive given the uncertain outlook.
"ICE and CME would be foolish not to look at LSE as this is one where you want to strike when the iron's hot. But because of Brexit, it just seems that 22 times next year's earnings in this environment is a risk," the analyst said.
ICE declined to comment. CME had no immediate comment.
VINEYARD CALLING?
Before quitting this week after more then eight years at the helm, CEO Xavier Rolet turned the LSE into a diversified exchange group by expanding its activities in stock indexes and buying a controlling stake in LCH Group.
Under the former investment banker, the LSE's share price increased fivefold and a successful merger with Deutsche Boerse would have added a significant futures business to its portfolio to catch up with U.S. rivals.
But the deal to create Europe's biggest stock exchange started to unravel after the Brexit vote as politicians bickered over whether the seat of power should be in London or Frankfurt. EU regulators killed the deal off in May.
In October, the LSE announced that Rolet would step down at the end of 2018 but days later, activist investor TCI Fund Management said the Frenchman was being forced out and it should be LSE Chairman Donald Brydon going instead.
According to a person close to TCI, the hedge fund started to have misgivings about Rolet's departure when it spoke to him the day after the 2018 succession plan was announced.
Asked whether he planned to spend more time at his family's vineyard in France, Rolet said he'd barely been to the winery in a decade and didn't care about it, according to the person, who said it was clear Rolet wanted to stay.
"When people answer questions in a certain way, it gives away their true feelings and thought processes," the person said, adding that Rolet declined to say why he was leaving.
A month of messy public wrangling followed, exposing a deep rift between the chairman and the CEO and dragging in the Bank of England. Rolet quit on Wednesday and TCI again called for Brydon to go.
On Thursday, the LSE said it would hold a shareholder meeting on Dec. 19 to decide if Brydon should be removed as demanded by TCI, the fourth-biggest LSE shareholder with a 5 percent holding.
SENDING MESSAGE
An adviser to the LSE said he was confident the vote would go against TCI. The hedge fund believes there is enough shareholder support to back its resolution.
Another hedge fund investor who plans to back TCI, accepted it was unclear if it would be successful.
"I still think it's important to send a message even if the vote is lost," the hedge fund investor said.
But even though Brydon's fate hangs in the balance and the row has shone a light on the breakdown in relations at the top of the LSE, its share price has held firm, meaning there is no quick bargain for a deep-pocketed predator.
Coupled with the uncertainty over Brexit and the risk that any merger might run into antitrust difficulties, the London exchange should have time to get back on its feet before any large rival swoops.
"We've still got a board, we've still got the executive team. They may launch a bid but the board is never going to recommend something unless it represents proper fundamental value and I think in the current regulatory environment I don't know if something will get through," said the adviser to the LSE.