London Stock Exchange Group PLC (LON:LSE) was already trading at an all-time high before reports that it was looking to buy Refinitiv were confirmed on Monday, so what’s got investors so excited?
For one thing, the deal was not expected.
“Large, surprising” were among the first words that sprang to mind for analysts at Deutsche Bank.
The market has been waiting for a big deal from the group ever since Goldman Sachs investment banker David Schwimmer took over as chief executive last year, said Russ Mould, investment director at AJ Bell.
“The surprise that London Stock Exchange wants to buy Refinitiv is not the appetite to do a mega-deal but the target itself.”
Many in the market had been expecting Schwimmer’s big deal to be for settlements group Euroclear, particularly after he oversaw the buying of a 5% stake at the start of the year.
Long-toothed market observers will see the deal as closing a circle that began decades ago, when the LSE first outsourced its TOPIC price display, data and news monopoly to outside suppliers in 1992.
The origins of Refinitiv go even further back, to the first quotations provided by Reuters in the 1850s and to the dataSTREAM terminals that first appeared in the City of London in 1969, produced by Hoare & Co, which was then bought by Dun & Bradstreet in 1984, which then sold the Datastream business to Primark (not that one) in 1992 before it was then gobbled up by Thomson Financial in 2001.
Giving its take on the market backdrop, LSE said the digitisation of the financial markets infrastructure “is driving customer demand for sophisticated data content and analytics provided on flexible and open platforms”.
“Against this backdrop, the board has conviction that a leading financial markets infrastructure provider must operate globally and across asset classes, with data management, analytics and distribution capabilities that can serve customers across asset classes and geographies.”
Schwimmer and co believe that the acquisition will “offer significant customer benefits across the full range of LSEG's businesses” by the expansion of the data and distribution capabilities and diversifying its trading capabilities across asset classes”.
According to market intelligence bods at Greenwich Associates, “data is the lifeblood of financial markets today now more than ever - and that data is getting more and more valuable”.
If it goes ahead, the deal will significantly enlarge LSEG’s data and analytics businesses and create an overall group with annual revenues of more than £6bn.
Serving more than 40,000 customer institutions across 190 countries, Refinitiv was spun out of Thomson Reuters last October, with the Canadian company selling a 55% share of what was its Financial & Risk division to private equity group Blackstone for US$17bn and retaining a 45% stake.
Among its many data-driven tentacles, Refinitiv owns a majority stake in the Tradeweb fixed income trading platform, which listed on Nasdaq this year, and owns foreign exchange platforms FXAll and Matching as well as distribution via the Eikon terminals business, which hosts the Reuters newswire.
The data platform has over 150,000 data sources, and provides real-time pricing, reference data, private and public company information and events, commodity, economic, quantitative and research data, and more than 10,000 news sources as well as Reuters, while average daily trading volume on the FXAll and other platforms regularly tops US$400bn in FX and US$500bn in fixed income.
Refinitiv could be viewed as three business, said the Deutsche Bank analysts: firstly a pair of “strong and structurally growing” trading platforms, a data and risk management services business, and finally a “challenged but still significant” desktop terminal business.
“The former two are the main targets of this transaction while the latter needs to be managed for cash flow to support a significant net debt post the transaction in our view,” the analysts added.
The proposed terms of the deal
Under the proposed terms, LSE would acquire Refinitiv for a total enterprise value of US$27bn (£22bn) including US$11.8bn (£9.5bn) net debt.
LSE, which expects the merger to deliver “strong” earnings accretion in year one and to unlock £350mln of cost benefits over five years, plans to finance the equity value by issuing shares.
Blackstone will emerge as the largest shareholder in the enlarged group, with a stake of around 22%, while Thomson Reuters would have about 15%.
But the two current owners of Refinitiv are expected to own around 30% of the total voting rights of the LSE and remain long-term shareholders of the enlarged group.
Does the deal makes sense for LSE?
LSE has been building up its data and trading arm for a while and under Schwimmer’s predecessor Xavier Rolet splashed out £4bn on data and clearing businesses.
Looking back, there was 2014’s $2.7bn deal for index compiler Russell Investments and The Yield Book, a provider of sophisticated fixed income analytics and models.
This has continued under Schwimmer, with ethical and sustainable data provider Beyond Ratings snaffled earlier this year.
Last year, LSE generated 44% of revenues from information services, mostly FTSE Russell, 31% from post-trade and clearing services and just 22% from capital markets, exchange fees and listing activity.
So Refinitiv fits neatly into recent patterns, says Mould: “As such the firm is much less dependent on volatile financial markets for its income and now has a strong grip on information that market participants simply have to have, whether they are index compilers, fund management institutions, hedge funds, investment banks, investment platforms or private investors.”
“This sort of sticky customer will play subscriptions and in some cases which have little choice but to do so, if they the fabricator of an passive fund which tracks a particular index, for example.”
Adding Refinitiv deal will also broaden LSEG’s real-time data and analytics capabilities in equities, fixed income, commodities, “to make it an even more formidable competitor to Bloomberg in what is becoming an increasingly oligopolised market,” says Mould, with market providers enjoying pricing power and thus juicy margins and cash flow.
In Deutsche’s eyes the potential takeover of Refinitiv will differ from the transactions that led to the group’s strong M&A track record as Refinitiv will be the LSE’s largest ever deal and it will be an acquisition of what is “in aggregate a low-growth business”.
Furthermore, the German bank said that buying Refinitiv “would remove any M&A takeout hopes” for LSE, which they said some investors have been hoping for.
The key to the deal is making the £350mln of efficiency improvements, Deutsche said.
Analysts at Berenberg were positive: “the valuation is attractive, the strategic logic is solid, the antitrust issues are low(ish) and the execution risk is average for the industry”.
So were those at Exane, who said high financial leverage at Refinitiv could boost earnings per share by about 21%in the first year of the deal, with the potential to take that above 30%.
While taking LSE's debt-to-EBITDA leverage to around 3.5 times, UBS estimated the deal would be “8% accretive for LSE in year 1 & 20% accretive in Year 3”, excluding any possible benefits from lower financing costs on the Refinitiv debt.
Any antitrust issues?
The first big challenge for LSE and Schwimmer, if a deal is agreed, will be to convince shareholders that it isn’t overpaying for the deal.
Due to the huge size of both companies, with Refinitiv operating offices in 90 locations around the world, including more than 20 European states, a probe by competition authorities is likely in the UK, US, Europe and elsewhere.
Berenberg does not envisage material issues, noting that European competition rules are “generally supportive of consolidation in the information services space”.