LONDON, Feb 11 (Reuters Breakingviews) - Elliott’s bet on London Stock Exchange Group (LSEG) (LSEG.L), opens new tab suggests there is value in the AI wreckage. The hedge fund has built a stake in the $52 billion exchange operator and data provider, whose shares have been hammered by fears of tech disruption. That offers some scope for the classic activist medicine, but perhaps the clearest takeaway is that the sell-off is overdone.

LSEG has some history with activists. Back in 2017 Chris Hohn’s TCI Fund Management agitated to shake up the board and keep CEO Xavier Rolet in place. Shortly after that current CEO David Schwimmer arrived and began an expansion in areas like data, including the $27 billion acquisition of Refinitiv, which sells financial market information to professionals through desktop products. But that strategy has now put LSEG in the spotlight again. The group’s shares have collapsed 35% in the past year as fears that AI models designed by Anthropic and peers could disrupt the business of buying and analysing data.

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Elliott hasn’t disclosed the size of its stake or publicly called for any action. However, it’s easy to see how it could apply the usual activist tricks to LSEG. The group is now valued at roughly 16 times forward earnings, in line with traditional exchange operator Euronext (ENX.PA), opens new tab, rather than the larger data peers that it more closely resembles. MSCI, for example, which operates indexes similar to LSEG’s FTSE Russell business, is worth 26 times forward earnings. That disparity means buying back stock would make sense, as LSEG has done in the past. And LSEG has some assets that could be sold. One option is to trim its majority stake in Tradeweb. Schwimmer could also cut costs: LSEG’s EBIT margin last year was just below 40%, lower than peers like Deutsche Boerse (DB1Gn.DE), opens new tab or MSCI.

Still, the AI backdrop could make it difficult to do more radical things like taking on lots of debt or a full breakup. Current fears over machine learning disruption might make it hard to achieve the best price, and selling more AI-resilient assets would only shine a bigger spotlight on the businesses left behind.

While it’s not clear exactly when Elliott bought its stake, the fact it is now emerging as a significant shareholder does suggest that the sell-off may be overdone. There’s good reason to believe that much of LSEG’s business, such as clearing or trading, will not be affected by generative AI, and its trove of financial data will still need to be plugged into models. And even selling desktop products to financial professionals won’t just disappear, given many of them use LSEG’s products for more than just analysis, such as trading. Jefferies analysts estimate that even if the desktop and risk intelligence business were valued at zero, LSEG would still be worth 90 pounds per share, some 20% above its current value. Given the severity of the selloff across data providers Elliott’s punt may be replicated by other activists.

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Context News

• Elliott Management has built a “significant” stake in London Stock Exchange Group, the Financial Times reported on February 11, adding that it did not know the size of the shareholding.
• LSEG shares have fallen around 15% year to date amid fears that AI models will disrupt its core data business. Its shares were up 2.4% as of 0958 GMT on February 11.

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Editing by Aimee Donnellan; Production by Shrabani Chakraborty

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Neil Unmack

Thomson Reuters

Neil Unmack is a Reuters Breakingviews Associate Editor based in London. He covers credit markets, hedge funds, and Italy. Previously he was a corporate finance reporter at Bloomberg News in London. He started his career as a financial journalist in 2001 at Euromoney Institutional Investor, where he covered structured finance for EuroWeek magazine. He was educated at Eton College and Oxford University, graduating with a first class degree in modern languages.

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