By Dimitrios Apostolopoulos (University of Warwick), Jo-Emma Berthet (King’s College London) and Iulian Pavăl (Bocconi University) - Date: 24/08/2019
Overview of the deal
Acquirer: London Stock Exchange Group
Estimated value: $27bn
Announcement date: 27/07/2019
Acquirer Advisors: Goldman Sachs, Morgan Stanley, Barclays, Robey Warshaw
Target Advisors: Evercore, Canson Capital Partners, Jefferies
UK-based global financial market infrastructure (FMI) operator LSE has acquired US-based data platform, transaction and distribution network Refinitiv in an all-share undertaking for a total enterprise value of approximately £22.2bn ($27bn). Given that both companies have complementary businesses and a similar ‘open access’ approach, the deal has a clear, strategic rationale. This should strengthen LSE’s position as a leading provider of FMI on an international scale, enabling the firm to capitalise on fast-growing markets such as Asia, in the context of increasing demand for data due to more rigorous regulatory requirements. The deal will shift LSE away from erratic trading revenue streams, which are being threatened by the rise of automated trading, to fee-based activity and differentiate it from peers including Nasdaq, Deutsche Borse, ICE and CME.
The transaction forms part of LSE’s diversification drive, after acquiring French ESG data provider ‘Beyond Ratings SAS,’ in June 2019, to expand its sustainable investment capabilities. The deal is expected to achieve £350m ($425.3m) of cost synergies after five years. Despite this industry-consolidation move, competing financial data and infrastructure firms, including Bloomberg’s iconic terminals, remain key market players, posing a threat to LSE’s latest expansions.
In the wake of the deal, Refinitiv’s CEO will keep his current position and join the LSE’s executive committee. Also, the firm’s owners will hold a 37% stake in LSE and less than 30% of total LSE voting rights, with three non-executive directors coming from Refinitiv.
“LSE’s plan to acquire Refinitiv, a global financial data and trading platform provider, makes good sense, we believe, and would accelerate its strategic shift toward data.” – Bloomberg Intelligence, July 2019
Company Details (London Stock Exchange Group)
The London Stock Exchange Group is a global financial markets infrastructure business covering Capital Markets, Post-trade services, Information and Technology Services. The LSE Group is the UK’s primary stock exchange, and its subsidiaries include the Milan Stock Exchange (Borsa Italiana), Frank Russell Company, FTSE International and Millennium IT. The group provides a range of information and data products including indexes, benchmarks and real-time pricing data. The Refinitiv deal announcement coincides with the LSE’s half-year results, which revealed total revenue increased 7% to £1.02bn ($1.24bn).
- Founded in 2007, headquartered in London, UK.
- CEO: David Schwimmer
- Number of employees: 4,400 (2018)
- Market Cap: $28,374m -EV: $29,830m
- LTM Revenue: $2,866m -LTM EBITDA: $1,396m
- LTM EV/Revenue: 11.14x -LTM EV/EBITDA: 22.93x
Company Details (Refinitiv)
Refinitiv is a privately-held global financial data analysis and trading platform provider, serving over 40,000 institutions in over 190 countries. The firm delivers data, insight and analytics across four customer segments: investment and advisory, trading, wealth, and risk management. Refinitiv’s Eikon terminals give access to up-to-date asset prices and trades, alongside its trading-execution system Redi. The firm was formed in 2018 after Reuters divested its Financial & Risk business to Blackstone for £16.46bn ($20bn), renaming it Refinitiv and it is jointly owned by Blackstone Group and Thomson Reuters. The firm also owns a majority stake in Tradeweb, the world’s largest over-the-counter rates trading platform.
- Founded in 2018, headquartered in London, UK and New York City, US.
- CEO: David Craig
- Number of employees: 18,500 (2018)
- Market Cap: $54,793 -EV: $72,652
- LTM Revenue: $5,772m -LTM EBITDA: $3,960
- LTM EV/Revenue: 12.59x -LTM EV/EBITDA: 9.48x
Projections and Assumptions
On 29th of July, London Stock Exchange Group (LSEG) shares rocketed 15% to £69.50 ($84.4) on the news of the finalisation of the deal, with a total market capitalisation on that day of £24bn ($29.2bn). LSEG shares’ value increased by more than 60% over the last years, as £4bn worth of data and clearing businesses were acquired in order to mitigate the effects of the 2008 financial crisis.
There are good reasons to question the price tag LSE is paying, despite the market’s positive reaction. Refinitiv was valued at £16.46bn ($20bn) when it became an independent firm out of Thomson Reuters last year. That deal gave 55% control to a consortium led by Blackstone while maintaining Refinitiv’s $13bn (£10.7bn) in debt. Regarding this deal, the LSEG is about to absorb several private equity loans, for which J.P. Morgan estimates their total value to exceed 4.2 times the post-tax, adjusted profits of the combined group, a very high value compared to the group profits.
Long Term Upsides
The deal is consolidated on multiple cross-market synergies aimed at creating a market data and trading powerhouse. LSEG will most likely operate globally and across asset classes, with data management, analytics and distribution capabilities that can serve various investor profiles, after smoothly integrating Refinitiv’s leading technologies and absorbing the sizeable network of professionals. Creating a data-based link between LSEG’s clearing house LCH and all Refinitiv-owned transaction and data services Eikon, AlphaDesk, Tradeweb and FXAll will not only cut transaction costs but will increase efficiency, reduce order’s execution times, improve market’s transparency and data transmission accuracy. This mix of market intelligence, trading platforms and compressive financial instruments’ services are expected to generate £350m in five years in benefit costs and will entitle an accretive deal for LSEG of 8% (in the first year) and 20% (in the third year), as per UBS estimates.
While the main features and benefits of this deal are outlined both by the companies and by multiple analysis, the financials’ dynamics must be carefully considered.The combination of a full range of services across all assets class will enable LSEG to gain a significant market share in the industry. Also, it will allow Refinitiv’s high financial leverage to boost earnings per share by 21% in the first year, with the potential of more than 30%, as per Exane estimates. Though the initial debt situation may seem harder to handle, the positive free cash flows LSEG has recorded will substantially improve Refinitiv’s margins from a current 36% EBITDA to an expected 5-7% financial growth in the next 3 years after the transaction closure. The free cash flows and the financial grow forecasts will exponentially help reduce the debt burden on the LSEG level. It is essential to understand that the evolution of the financial performance of the LSEG, should the deal receive shareholder and regulatory approval, is subject to post-Brexit regulatory and market policy changes, but also the future market conditions.
Another long-term upside is the creation of an oligopoly in the data analytics and distribution market. With Refinitiv, LSE would leapfrog ICE by leveraging its buy- and sell-side workflow solutions but will still be in direct competition with Bloomberg, an American company providing similar services to those of the target. However, as some commentators fear, the acquirer may not achieve the same market share or margin targets as its rival, as the private-owned Bloomberg is able and willing to sacrifice more financial and organizational resources to retain its market share and outperform LSEG. It is assumed that the acquirer will shift its business strategy and focus on its competitive advantage, which is the integration of Refinitiv’s trading platforms with the LCH, offering superior services and truly flexible pricing to its users.
Risks and Uncertainties
Although the deal is expected to lead to substantial cost savings, it also entails LSE taking on of a $13.5bn bridge loan to cover Refinitiv’s considerable debt. This has yet to be scrutinised by antitrust regulators in several countries, which may take over one year. Indeed, Refinitiv’s hefty net debt ($13bn) compared to LSE’s ($1.11bn), would materially increase LSE’s leverage and push the combined entity’s debt-to-EV ratio to roughly 25% as opposed to less than 10% for LSE currently. This is notably higher than its competitors. While this places extra pressure on synergies being achieved, LSE’s extra leverage could lead to cash being channelled into debt repayments instead of capital being returned to shareholders.
Another concern is the question mark above LSE’s position in the case of a hard-Brexit, given the deal is expected to be completed by 2H 2020, following expected regulatory policy changes such as forced relocation. Moreover, regardless of Brexit, uncertainty remains around the outcome of EU proposals to regulate non-EU clearing houses. This may lead to London clearing houses, such as LSE’s LCH, losing billions in daily swaps trading as a result of increased regulatory oversight and higher trading costs for banks. Similarly, though LSE’s main growth drivers will remain the FTSE Russell Indices and LCH, each accounting for 30% of revenue, Capital Markets (20%) is dependent on volatile trading volume. Furthermore, LSE’s CFO announced there could be a head-count reduction in the newly formed group to reduce expenses, given a number overlaps in technology, property and corporate functions. It is also expected that in the long-run, LSE will be subject to a significant increase in costs (particularly depreciation) as a result of continuous investment spending.
Another notable point is LSE’s recent failed proposed merger with Deutsche Borse, potentially signalling overconfidence in this new transaction’s expected regulatory approval. Consequently, LSE may be required to make divestments for the deal to proceed, while Refinitiv would receive a £198.3m break fee if regulatory permission isn’t granted. These deal-specific uncertainties come alongside existing market risks, including the presence of LSE’s strong competitors, which may inhibit its endeavour to obtain market share in the data-provision sector.
“LSE’s $27bn bid for Refinitiv likely faces rigorous scrutiny in Europe, but antitrust concerns may be small compared with the size of the deal, in our view. Horizontal overlaps are too small to derail the deal, and the possibility of vertical foreclosure could be fixed with remedies.” – A. Ortiz and G. Gunchev, litigation & banks analysts (Bloomberg Intelligence)
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