London Stock Exchange CEO Xavier Rolet, left, and CEO Thomas Kloet of TMX Group hold a press conference in Toronto to announce the proposed merger of the exchanges, a deal that was later scuppered. LSE and TMX did however create a joint fixed-income index business.Chris Young/The Canadian Press
The value of the index business tucked inside TMX Group Inc. is highlighted by news that yet another bidder may join the battle for Russell Investments – not for the company's money management assets, but for its index business.
London Stock Exchange Group PLC is in talks for a deal with Russell's owner, Northwestern Mutual, and could pay as much as $2-billion (U.S.) to get its hands on an index business that is probably best known for the Russell 2000 index of small-cap U.S. stocks. MSCI Inc. is also reportedly interested in the index business.
Why the fuss about indexes? Licensing fees. Build a popular index and all sorts of users will license it to build derivatives or to use as a benchmark for a portfolio or as the basis for an exchange-traded fund. Those licences create a nice steady stream of cash flow, and everybody loves cash flow. Indexes have proliferated as providers try to build ones that will be hits with investors, and to take advantage of new themes and trends in investing. Every region, subgroup and investing idea has its own index.
For all that, the TMX's index business does not get much love or attention. As a legacy of their failed merger attempt, LSE and TMX did create a joint fixed-income index business. TMX vended in its PC Bond business, and got back $104-million in cash and $51-million in shares, representing 25 per cent of the new joint bond index provider. That valued FTSE TMX Global Debt Capital Markets Ltd. at $204-million. Since then the business has expanded by purchasing a European bond index provider.
Russell is an equity index provider, so a purchase by LSE is unlikely to affect the TMX partnership. But what it does do is highlight that such businesses are very valuable these days. FTSE TMX indexes are used by ETF providers such as RBC, and to the extent that bonds stay in the spotlight, there are strong grow prospects.
TMX has an option to sell its minority stake in the joint business to LSE after six years, and if the interest in indexes now is any indication, shareholders would do well.