Investors rarely endorse deals as wholeheartedly as they did
London Stock Exchange Group
’s roughly $15 billion proposed acquisition of data provider Refinitiv on Monday morning. The euphoria needs to be balanced by recognition that this would mark a big step up the risk curve.
LSE stock jumped 15% Monday. Early Saturday, the company, which owns big clearing and index units as well as its eponymous capital-markets business, confirmed a Financial Times report that it was in talks to buy Refinitiv. LSE would pay $27 billion, including $12.2 billion of net debt that it would assume. Refinitiv’s current owners,
and its financial partners and
would get a 37% share of LSE.
Blackstone looks like the clearest winner. Together with its partners, it agreed to buy a 55% stake in Refinitiv, as it was renamed, from Thomson Reuters in January 2018 at a stated valuation of $20 billion. The deal was highly leveraged and the partners put in just $3 billion of equity. On paper, the LSE deal would turn that into at least $7.5 billion in less than two years.
The caveat is that the payoff is in LSE stock, not cash, and the sellers would be subject to lockup agreements. In effect, the Blackstone consortium is rolling its bet on Refinitiv into a larger vehicle, giving up some control in exchange for a share of the extra cost savings available through a merger. LSE estimated these savings at £350 million ($433 million) five years after the deal’s completion—equivalent to almost 6% of the companies’ combined 2018 sales.
LSE’s existing shareholders also would get the benefit of those cost savings—one reason why the shares jumped Monday. The other reason is that the company, by assuming Refinitiv’s private-equity debt load, would leverage up, boosting earnings per share. Net debt would be equivalent to 3.3 times earnings before interest, taxes, depreciation and amortization, according to calculations by Exane BNP Paribas. That compares to a multiple of 1.8 times at the end of last year and LSE’s target range of between one and two times.
Yet LSE also would assume massive operational risk in trying to swallow a larger entity. The U.K. company made Ebitda of $1.4 billion last year, less than the $1.6 billion made by Refinitiv. LSE has integrated data acquisitions successfully before, notably U.S. index provider Frank Russell, but nothing on this scale.
The company said the deal would help it offer a fuller range of trading and data services to clients. The rise of electronic trading and passive investing, which have both put pressure on the industry’s ecosystem of fees, lurk in the background. With big cost savings on offer, investors are less likely to quibble with the strategic logic.
LSE may well announce full details of the deal alongside half-year results Thursday, when Chief Executive David Schwimmer will in any case need to face the press and investment community. A convincing explanation of how such a complex integration would work and a plan to reduce leverage will help keep investors on board.
Write to Stephen Wilmot at email@example.com
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