The Depository Trust & Clearing Corporation (DTCC) and LCH.Clearnet Group (LCH.Clearnet) today jointly announce that they have signed non-binding heads of terms regarding the proposed merger of the two companies. The merger proposal aims to create the world’s leading clearing house, which would operate a user-owned, user-governed model, with LCH.Clearnet moving to an at-cost based structure comparable to DTCC’s within three years. As a result of the transaction, LCH.Clearnet shareholders would receive total consideration of up to €739 million (€10 a share), the majority of which would be funded through LCH.Clearnet’s revenue.
Euroclear, currently the largest shareholder in LCH.Clearnet, with a holding of 15.8%, intends to support the transaction in principle and remain a shareholder of LCH.Clearnet HoldCo, and to thereby cement a strong partnership in European post-trade solutions.
It is anticipated that the proposed merger will result in significant synergies and efficiency gains, largely derived from technology savings, as well as significantly enhanced economies of scale. In addition, for the first time both the U.S. and Europe would be supported by a common infrastructure. As a result, we expect further reductions in the costs of LCH.Clearnet’s and DTCC’s services, most notably for equities in both Europe and America.
The combined group would focus on maximising value to users whilst ensuring the highest standards of risk management. Its clearing and depository infrastructure would be underpinned by a significant breadth of financial expertise, proven risk management capabilities, volume capacity and market-leading technology solutions.
The range of markets and services covered would be broad and diverse and would include such asset classes as equities, fixed income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and OTC products such as interest rate swaps, credit default swaps, carbon emissions and freight contracts. Clients served globally would include several thousand broker/dealers, banks, institutional investors, hedge funds, trust companies, mutual funds and insurance carriers and other third parties who market financial products.
The management of both parties believe that users would benefit from:
A global at-cost, user-owned, user-governed clearance and settlement infrastructure, dedicated to serving the needs of its users and which, once the cost of operations have been covered, would return excess revenue to users in the form of rebates, discounts or tariff reductions.
Significant anticipated cost savings deriving from: IT synergies; enhanced economies of scale; integrated and efficient collateral management and other operational efficiencies. Initial indications suggest that synergies would amount to approximately 7 – 8% of the combined group’s operating costs. *
* These cost saving estimates are based on internal analysis by the parties and are subject to completion of due diligence and confirmation from independent third parties.
A transatlantic clearing house of significant financial strength, offering the robustness in processing capacity and operational capabilities required to underpin today’s financial markets.
Sophisticated risk management capabilities, the resilience of which has been proven in both companies during the current financial markets crisis.
Access to default funds and potentially increased cross-margining, which maximise the efficacy of members’ capital contributions and provide a safeguard in volatile market conditions.
The leveraging of financial services expertise across the group in order to develop innovative, market-leading clearing and settlement solutions for established and emerging asset classes, in partnership with market participants.
The non-binding heads of terms include the following main provisions:
DTCC will acquire 100% of the ordinary shares in LCH.Clearnet. The transaction will result in LCH.Clearnet shareholders receiving total consideration of up to €10 a share. The consideration will comprise: DTCC voting shares; shares in the vehicle acquiring LCH.Clearnet, which carry rights to receive LCH.Clearnet future profits available for distribution for up to three years; and a pre-closing special dividend from LCH.Clearnet. On the basis of €10 a share, the approximate implied equity value of LCH.Clearnet would be €739m.
Assuming no changes in share count, the total number of new DTCC voting shares issued to LCH.Clearnet shareholders will be 12,186, representing 34% of DTCC’s enlarged share capital.
The terms of the definitive agreement remain subject to completion of satisfactory due diligence.
The combined group will follow DTCC’s existing practice of regular mandatory rebalancing of its shareholder base to ensure that share ownership is in line with usage. Consequently, within 12 to 18 months of the completion of the merger, it is intended that there will be a rebalancing among the former LCH.Clearnet shareholders to bring ownership fully into line with usage.
Former LCH.Clearnet shareholders will have substantial representation on the board of LCH.Clearnet HoldCo and Roger Liddell will be the CEO of the new LCH.Clearnet HoldCo and Donald F. Donahue will be the chairman. LCH.Clearnet will also benefit from having significant representation on the board of DTCC, including management representation.
Following the payment of all the deferred consideration to shareholders, which is expected within three years, LCH.Clearnet HoldCo intends to move to an at-cost based service delivery model on a basis consistent with that currently operated by DTCC.
With effect from the completion of the merger, all of the newly combined group’s European business will be brought under common management to provide the most economic and effective service to users. Following resolution of certain key commercial, legal, tax and regulatory issues, it is intended that DTCC’s existing European subsidiary, EuroCCP, will join with the new LCH.Clearnet HoldCo to form a single European clearing business.
Euroclear plc support
Euroclear, which is LCH.Clearnet’s largest shareholder with a holding of 15.8%, has agreed to support the merger in principle, subject to final terms and conditions. Immediately after the completion of the proposed transaction, it is expected that Euroclear will acquire a similar proportion of shares in the new LCH.Clearnet HoldCo. This investment will help cement a strong partnership between the two organisations, allowing Euroclear and LCH.Clearnet to maximise service advantages and efficiency opportunities for users.
LCH.Clearnet and DTCC shall continue negotiating on the basis of the non-binding heads of terms. LCH.Clearnet and DTCC anticipate being in a position to sign definitive documentation and announce the detailed terms of the transaction by 15 March 2009. The signing of binding transaction documentation is subject to a number of conditions including; consultation with the Works Council in the French subsidiary of LCH.Clearnet, the approval of shareholders, including receipt of binding commitments to support the transaction from certain LCH.Clearnet shareholders, the approval of relevant regulators and certain tax authorities and the completion of satisfactory mutual due diligence.
Commenting on the proposal, A. Chris Tupker, chairman of LCH.Clearnet said:
"The critical role and value of clearing houses has been highlighted by recent events. The merger of our companies will enable our users to benefit from a broader geographic footprint and a greater range of expertise as well as realising important efficiencies and economies of scale."
"For our shareholders, the merger would offer the opportunity of receiving a substantial consideration. Furthermore, it would enable both the European and U.S. financial communities to benefit from the services of a user-owned, user-governed, at-cost model across a broader range of markets and asset classes."
Donald F. Donahue, chairman and chief executive officer of DTCC added:
"By combining DTCC and LCH.Clearnet’s natural synergies and complementary skills, we expect our customers will not only see significant cost savings in the clearance and settlement of the many securities and instruments we already service, but also greater access to a more diverse range of product offerings and support of emerging asset classes. A good example is the potential to leverage the expertise between Swapclear’s support of interest rate derivatives and Deriv/SERV’s capabilities in credit default swaps."
"We are also very excited to gain the expertise and shared commitment to serving customers that is so evident among LCH.Clearnet employees. DTCC has grown over the past decade through the combination of multiple clearing corporations and depositories. Our success, as an organization, is tied to our ability to work, collaborate and partner with others in the industry, never losing sight of our larger goal to reduce risk and costs for our users."