London -- The London Stock Exchange (LSE.L) is buying British publisher Pearson's (PSON.L) 50 percent stake in FTSE International for 450 million pounds ($703 million) to take full control of the index firm and ramp up its derivatives business.
The LSE, which already owns half of FTSE, has ambitions to challenge Europe's top futures exchanges, NYSE Euronext's (NYX.N) and Deutsche Boerse's (DB1Gn.DE) Eurex.
"Crucially, it is an excellent fit for our growing derivatives operations and will help us develop new tradeable products," David Lester, director of information services at the LSE and Chairman of FTSE International, said on Monday.
The LSE said the deal, which it hopes to close in the first quarter of next year, will be funded from existing resources, although it has commitments from banks for 350 million pounds in additional debt for more "full financial flexibility."
The transaction is central to the LSE's push into listed derivatives trading which began in June when it started offering a FTSE 100 futures via its electronic platform Turquoise in a direct challenge to NYSE Euronext's Liffe.
The deal also strengthens the LSE's links with asset managers, which use FTSE indices for benchmarking their funds' performance, whereas the LSE has traditionally had stronger ties with banks and brokers.
Analysts said Pearson, which owns the Financial Times newspaper, Penguin Books and a large education unit, had secured a decent premium for a business that was no longer core to its central strategy.
"It's a good price from Pearson's point of view and it continues the process of them rationalizing their non-core assets," Panmure Gordon analyst Alex DeGroote told Reuters.
"People in the market will likely make the follow-on observation that the FT looks a more plausible sale candidate now than before but I'd make the point that there's absolutely no need for them to sell it in a hurry," he added.
Shares in Pearson were flat at 1310 GMT, while LSE shares were down 4.5 percent and the FTSE 100 Index down 0.7 percent.
The acquisition is the latest move by LSE Chief Executive Xavier Rolet to take tighter control of the various business units that the LSE relies on to offer its trading, clearing, data and technology services.
The LSE bought technology company Millennium IT two years ago and that firm now underpins its main trading venues.
The exchange also entered exclusive takeover talks with its main clearing provider LCH.Clearnet in September and hopes win shareholder support for its bid of 21 euro a share for 51 percent of the clearer.
The FTSE approach is Rolet's latest foray into the mergers and acquisitions market after his high-profile plan to buy Canada's TMX Group (X.TO) for C$3.6 billion (2.3 billion pounds) collapsed in June.
The exchange pulled the bid when it failed to win sufficient support from TMX shareholders faced by a rival bid from a consortium of Canadian banks.
The LSE's largest European rivals -- NYSE Euronext and Deutsche Boerse -- are hoping to convince European competition authorities to back their $9 billion merger and last week were reported to be mulling spin-offs to allay anti-trust concerns.
Pearson CEO Marjorie Scardino said in a statement: "FTSE's strategy is different from our own. We wish it every success as we continue to build our digital business information services around the Financial Times."
FTSE International made earnings before interest, tax, depreciation and amortization of 40 million pounds in 2010, Pearson said, more than some analysts realized.
"It does suggest other parts of FT Group may be less profitable than the market expects, but with FT valuations more driven by trophy asset value rather than near-term profitability, we believe this should not impact consensus valuations," UBS analyst Alastair Reid wrote in a note.
Pearson used much of the $2 billion it collected from the 2010 sale of data provider IDC for education acquisitions in China and India. Last month, it bought a Chinese English-language training company for $155 million, extending its reach in China from eight cities to 60.
"We are freeing up capital for continued investment in a proven strategy: becoming more digital, more international and more service-oriented in education, business information and consumer publishing," Scardino added.
By Kate Holton and Luke Jeffs
(Additional reporting by Sarah White and Georgina Prodhan; Editing by Hans-Juergen Peters and Mark Potter)