LSEG/Refinitiv: Into a new dimension?

LSEG would acquire the company for a $27bn enterprise value.
We have been very positive on LSEG for more than four years, as we have branded it as the sole Fintech in Europe. The acquisition of Refinitiv would confirm that thesis.

The deal would mark a strong push into the data business (currently branded Information Services within LSEG) and make the company less dependent on volatile capital markets (trading and clearing). Its share price is up almost 15%.

LSEG could announce as soon as this week that it has reached an agreement with Refinitiv’s main shareholders (Thomson Reuters and a consortium led by Blackstone) for the acquisition of the data suppliers company.

Given the amount at scale, the deal would be transformative both in size (about £32bn or $40bn market cap) and in business. Data will drive most of LSEG’s revenues (it makes about 40% of total revenues now).

Using reported 2018 EBITDA, LSEG would pay Refinitiv about 17x EBITDA (but 13x if adjusted for $469m of one-offs in 2018) vs a 15x EBITDA for LSEG and Deutsche Boerse. Blackstone acquired the company in January 2018 at a $20bn valuation but it is worth reminding that LSEG’s share price is up 55% since then.

The UK company would pay the deal with newly-issued LSE shares, turning Refinitiv’s investors into LSE shareholders (owning about 37% of the combined entity).

Our take

Refinitiv is a global financial data provider. Its trading venues business includes the Tradeweb trading platform and the FXAll and Matching platforms (among others). As a reminder, Deutsche Boerse was in talks about acquiring FXAll (for about $3.5bn).

According to its financial statements, Refinitiv generated about $1.6bn in EBITDA in 2018 but this included $469m of one-offs, among which “transaction costs, non-underlying severance and separation costs, and other one-off items that would be classified as non-underlying costs under LSEG’s accounting policies”.

Based on this adjusted EBITDA, LSEG would pay about 13x EBITDA for the assets (debt + equity). The $27bn price tag is 35% higher than that paid by Blackstone in January 2018 but, at the same time, LSEG’s share price has increased by 55%. Hence any equity raising would make sense as of today.
LSEG will be able to pay the price (about $13.5bn equity value) with newly-issued shares and, according to management, the transaction would deliver adjusted EPS accretion in the first full year after completion (LSEG would indeed take on about $13.5bn of debt). Using a 2017-18 average for the calculation of the D&A, we calculate the deal would be about 20% earnings accretive in the first year (vs 2019 EPS expectations). 

Management expects cost synergies of about £350m, or about 12.5% of Refinitiv’s cost base. This is a realistic number in our opinion, even more if it takes into account the already announced cost savings when Blackstone purchased Refinitiv ($650m expected by the end of 2020 and Refinitiv had achieved an annual run rate in cost savings of $350m as at 31 March 2019).
Taking into account these synergies and the adjustment for one-off costs, the price paid is in the area of 11–11.5x.

The deal will not raise any questions in financial terms. The risks lie on both regulatory hurdles and integration risks.

The deal is expected to go into a phase II investigation in the European Union. Yet, if the UK leaves the Union on 31 October 2019, then it would raise the question as to whether the European Union’s investigation would be valid. In any case, whereas pure mergers (such as the aborted DB-LSEG) are sensitive, we do not beleive there exists any competitive issues in the LSEG-Refinitiv deal. 

The integration of a bigger company (by assets as evidenced by the EV of Refinitiv) is the biggest challenge for LSEG. The former CEO had shown high capability in integrating the various acquisitions. The new CEO David Schwimmer will have to show he can do the same.