Beware of ‘frothy’ SPACs, London Stock Exchange warns investors

The “frothy” U.S. market for special purpose acquisition vehicles (SPACs) could see investors coming off “poorly”, London Stock Exchange Chief Executive David Schwimmer warned on Friday after proposals for Britain to loosen SPAC listing rules.

Listings of the so-called “blank cheque” companies which use the proceeds to take private firms public through a reverse takeover, have rocketed in New York and exchanges elsewhere are keen to jump on the bandwagon. That has raised concerns about inflated valuations.

“There is clearly some froth in the U.S. market for SPACs,” Schwimmer told reporters.

“Some of that could end poorly for some of either those opportunities or some of those investors.”

A government review this week recommended making it easier for SPACs to list on the LSE.

Schwimmer said there have always been speculative cycles in markets and SPACs do have a role to play in the capital market, but it was important that investors use them “thoughtfully and carefully”.

MARKET SPOOKED

The London Stock Exchange Group (LON:LSEG) announced a 7% dividend increase for 2020 on Friday as integration of its $27 billion acquisition of data and analytics company Refinitiv stepped up a gear.

Revenue grew 3% to hit 2.1 billion pounds ($2.92 billion), driven by growth in the FTSE Russell and clearing businesses. Adjusted operating profit was up 5% to 1.1 billion pounds.

LSE shares, however, fell nearly 12% to 8,370 pence. Citi cut the stock to neutral from buy, citing guidance on heavier than expected costs.

“A need to improve the resilience of the legacy Refinitiv tech platform, suggests the bulk of the incremental 150 million euros operational expenditure investment will recur in 2022 and beyond,” Citi said in a note, adding that an earnings-per-share accretion target for this year now “looks very difficult to achieve”.

Credit Suisse (SIX:CSGN) said guidance for cost growth this year has “spooked the market”, raising questions about whether LSEG still deserves a premium rating compared with its European peers.

The exchange said that its FTSE Russell stock indexes business in Britain and most of its other information services will be slotted into a newly formed data and analytics division, as data now eclipses the group’s trading operations since the Refinitiv acquisition.

“While early days, the work we have done so far confirms the quality of the business and the extent of the opportunities across the group as we focus on integration and delivering the strategic and financial benefits of the transaction,” Schwimmer said in a statement.

He declined to put a figure on job cuts, but said there will be a reduction in “overlapping senior leadership” this year. Savings will also come from rooting out overlapping locations, efficiencies across vendors and at some data centres.

The group will keep its offices in London’s Canary Wharf, where Refinitiv is based, and the exchange’s head office in the City of London.

Schwimmer said he was confident that London will remain a global financial centre and that a shift in 8 billion euros of daily share trading from the City to Amsterdam in January due to Brexit had been anticipated.

It will have little impact on the LSE Group given that its euro share trading largely relocated to its new hub in Amsterdam, Schwimmer said.

LSE said it would pay a final dividend of 51.7 pence a share as a reflection of the “good performance and confident outlook” for the new group”.

Thomson Reuters, the parent company of Reuters News, now holds a 15% stake in the exchange following the Refinitiv deal.

($1 = 0.7201 pounds)