Blackstone on the move
In the biggest deal since the financial crisis, Stephan Schwarzman’s Blackstone took a majority stake in the financial and risk division of Thomson Reuters, for $17.3bn.
Both parties do not need any introduction. On the one side we have Blackstone, one of the world’s biggest private equity houses with $387bn Assets Under Management (AUM), governed by Mr Schwarzman one of the eminent figures in global finance. On the other, we have Reuters, the second biggest financial data provider with 23% market share in financial market terminals.
This transaction is interesting from several perspectives. Firstly, considering its size, terms and structure of the deal, it is the biggest Leveraged Buy-Out (LBO) since the financial crisis and one of the biggest in the history. For Blackstone, it is its biggest deal since $26bn buyout of Hilton Holdings in 2007. Blackstone will pay $3bn cash and the rest will constitute $14bn in debt and preferred equity, which will be put on the new company’s balance sheet. The consideration includes a 55% stake in the soon-to-be divested division of Thomson Reuters. Moreover, for the purpose of such a big transaction, Blackstone paired with two major institutional investors, which will also participate in the cash component - Canada Pension Plan Investment Board and GIC Pte (Singapore’s sovereign wealth fund). The remaining 45% will stay with Thomson Reuters. The division is the major earnings source for the Thomson group, as it accounted for more than 50% of its Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA) in 2016. The F&R business had revenues of $6 billion and an EBITDA of $2 billion for the year ending 2017.
The deal is undoubtedly a major event for financial information industry, as Blackstone will aim to tackle Bloomberg’s dominance. One needs to acknowledge that Blackstone is the major fee payer to investment banks all over the world and will try to leverage its position to encourage them to buy Eikon and Elektron subscriptions. Analysts comment that the investment idea for Thomson Reuters resembles Ipreo deal in 2014. Back then, Blackstone used its relationship on the street to increase the usage of Ipreo, which is a capital markets data provider. The growth might also come from the forecasted uptake in volatility, which will spur revenues in trading divisions – main customers for terminals. Following the Thompson transaction, Mr Peter Grauer, Bloomberg chairman, left the Blackstone board as a step against the potential conflict. As always in such investments, Blackstone is planning to cut costs of the division to free cash for debt repayments. It is going to be done through job cuts in Europe, US and their respective relocation to some cheaper offshoring locations.
For the Thomson group the deal represents a lucrative and pro-growth sale. On top of all transaction consideration, its news division will receive $325m annually for the next 30 years for the content. As the usage of Eikon terminal will grow then the rest of the group will benefit from some compatible products and news provision. The proceedings from the sale will contribute to debt repayment as well as share repurchase. Following the transaction Thomson Reuters will be left with News, Legal and Tax & Accounting divisions.
According to Andre Adams, CEO of Quayle Munro advisory firm, this deal will accelerate further M&A activity in the sector as well as it depicts strong valuations for quality assets.
On the announcement, the Thomson Reuters share price rose 7% to $46.52. When it comes to Blackstone in the two following days share price fell 2.5%.
A buyout consortium led by Blackstone was advised by Canson Capital Partners, Bank of America, Citigroup as well as by JPMorgan. On the other hand, Guggenheim Securities, TD Securities Inc. and Centerview Partners provided their advisory service to Thomson Reuters.
Looking way into the future, some media outlets point out to potential buyers of the division such as Intercontinental Exchange or the London Stock Exchange Group. However, it will take a couple of years for Blackstone to exits its new investment.
The transaction is expected to close in the second half of 2018.