Blackstone-Thomson Reuters deal paves way for more
For more than a decade, the Thomson family has wrestled, at great expense, with a big problem: how to derive value from the £8.7bn acquisition of Reuters by the family’s company, Thomson Financial, in 2008 and the dozens of other smaller data and trading assets it has subsequently bought.
Thomson Reuters’ move to sell a majority stake in its financial terminals and data business for $17bn to Blackstone, the private equity group, marks the biggest shake-up for the group since its formation just before the onset of the financial crisis.
It was due to be announced on February 8 alongside Thomson Reuters’ earnings, but was accelerated after the Financial Times made inquiries about the deal last week.
It signals an acknowledgment by the family that its long-running efforts to create a financial and media information powerhouse to rival Bloomberg have fallen flat.
The Thomson family, which owns 63 per cent of Thomson Reuters through its holding company, Woodbridge, may have recognised that the industry was moving faster than they could keep up, said Spencer Mindlin, an analyst at the Aite Group.
“We’re really at a pivotal point where there’s a lot of investment and interest in financial technology like artificial intelligence and blockchain. Even though they’ve been doing fine, the risk of falling behind is greater now than ever before,” he said.
Blackstone’s interest focuses on Thomson Reuters’ financial and risk business, which is devoted to trading on financial markets. The division had $6.1bn in sales in 2016, accounting for the majority of company revenues.
The 11,000-employee subsidiary comprises the bulk of the “old Reuters” business, albeit shorn of its famous newsgathering division. It includes Eikon, its information terminal, and Elektron, which provides data and trading infrastructure for investors, as well as some of the world’s largest electronic trading venues for foreign exchange and fixed income, such as Tradeweb. It also has a partnership with Symphony, a cut-price messaging service created to compete against Bloomberg.
Thomson Reuters, like many rivals, grew rapidly in a bull market in the early part of the century. It enjoyed three years of better than expected cost savings following the 2008 merger, but it struggled to integrate the two legacy companies’ products and with the rollout of Eikon, and has taken numerous financial charges and laid off thousands of employees over the years.
The trading businesses have shown signs of life in recent months. Tradeweb accounted for most of Thomson Reuters’ 6 per cent growth in adjusted earnings in the first nine months of 2017.
“There are a lot of wonderful assets in there. Now that volatility looks like it might be coming back, it looks like the time might be right,” says one former executive.
But the bulk of the unit’s revenue comes from investors and banks subscribing to services — a business that has come under increasing pressure in recent years as Wall Street has tried to keep costs low. In 2016 Bloomberg suffered a drop in terminal numbers for only the second time in its history, according to Burton-Taylor International Consulting.
Thomson Reuters has continued to lose market share to its biggest competitor, even as users complain at paying the annual cost of $22,000 for their Bloomberg terminals. The company owned by New York billionaire Michael Bloomberg expanded its grip to 33.4 per cent of the market in 2016, versus 23.1 per cent for Thomson Reuters.
A person familiar with the deal said Blackstone intended to use its longstanding relationships with Wall Street’s largest financial institutions to boost the take-up in terminals.
“Blackstone is the biggest fee payer to investment banks around the world. Having one of their principal customers backing the Reuters business is very helpful,” this person said.
The new owner is also preparing to rip-out costs in a number of ways, including by removing staff in expensive locations such as the UK and US in favour of offshoring jobs.
The deal could also pave the way for further dealmaking in the financial information sector, where Thomson Reuters is facing fierce competition from nimbler rivals.
Blackstone is likely to look for an exit in a few years, having already identified possible acquirers of the unit in Intercontinental Exchange and the London Stock Exchange Group, a person close to the deal said.
In addition to trailing Bloomberg in market share, Thomson Reuters’ share price in recent years has lagged behind the exchanges and data providers that compete with the financial and risk business Blackstone is buying into.
IHS Markit, formed out of the merger of two smaller rivals, has seen its value rise by a fifth in the last year to a market capitalisation of nearly $19bn — outperforming Thomson Reuters by 17 per cent.
MarketAxess, a corporate bond trading venue often compared to Tradeweb, has risen nearly 80 per cent in the last two years and has a market capitalisation of more than $7bn.
Bloomberg chairman Peter Grauer sits on Blackstone’s board of directors, meaning he will have a view into the two leading terminal providers.
In spite of the threats facing the financial information business, private equity has been eyeing the industry, attracted by the stability of its subscription revenues.
One deal that many observers point to is Pearson’s £1.3bn sale of its stake in Interactive Data Corp, a financial data provider, in 2010 to US private equity investors Silver Lake and Warburg Pincus. Five years later it was bought by Intercontinental Exchange, the US exchanges operator, for $5.2bn.
Mr Mindlin of the Aite Group expects Thomson Reuters to continue to operate a more “open” ecosystem that allows outside parties to connect to its systems and share news and information. That policy has driven initiatives like the Symphony chat service, which is backed by Goldman Sachs and BlackRock, and allows users to share charts, news and data.
By retaining the 45 per cent stake in the financial and risk unit, “Thomson’s remaining piece of the pie will grow to be much more in the longer-term”, Mr Mindlin said.
Thomson Reuters will use the $17bn in gross proceeds from the deal to pay down outstanding debt, pay cash taxes, transaction expenses and other costs related to setting up the new standalone business, repurchase shares and “pursue organic and inorganic opportunities” in its legal and tax and accounting divisions.
Whether the deal will affect the 168-year-old Reuters News service remains to be seen. The Blackstone stake excludes Reuters News, part of Thomson Reuters’ lossmaking corporate unit. The service employs 2,500 journalists, down from about 3,000 in 2011, and accounts for 3 per cent of overall revenue.
As part of the deal, Blackstone has agreed to pay Reuters News a minimum of $325m a year for 30 years, adding up to nearly $10bn over three decades, to keep supplying news to Eikon terminals.
“It would appear the impact may be indirect, more on what kind of resources Reuters will now have to pay journalists,” said Ken Doctor, media analyst at Newsonomics. “Though not in the spotlight, it still pays one of the biggest journalistic workforces in the world.”