LONDON (Reuters Breakingviews) - London Stock Exchange Group is making a big bet on big data. The bourse operator on Thursday confirmed its plan to take over financial information purveyor Refinitiv for $27 billion, including debt. To make the numbers add up, Chief Executive David Schwimmer will not just have to cut costs, but find new sources of growth.
It’s only 10 months since Refinitiv was carved out of Thomson Reuters, owner of Breakingviews, in a partial buyout worth $20 billion. Major shareholder Blackstone has been busy slashing costs: the buyout group is more than half way to its target of lowering annual expenses by $650 million. Schwimmer reckons combining with LSE will enable him to slice off a further 350 million pounds a year, or about $425 million.
Add those figures to Refinitiv’s underlying results for last year, and the data provider’s EBITDA would rise to roughly $3.1 billion. Deduct Refinitiv’s depreciation and amortisation charge of $864 million for 2017 - the last full year before the buyout - and tax what’s left at the LSE’s 22% rate. This produces a return on investment of 6.5%, below the company’s weighted average cost of capital of 8-9%.
This humdrum number doesn’t tell the full story, though. For a start, LSE is inheriting Refinitiv’s 54% stake in Tradeweb Markets, the electronic bond and derivative trading group which listed in New York earlier this year and has an enterprise value of just over $10 billion. Deduct that holding from the purchase price, and remove Tradeweb’s EBITDA of $250 million last year, and the LSE’s return on investment improves to 7.3%.
To be sure of earning an economic return for shareholders, Schwimmer will therefore have to boost growth at Refinitiv, which has been grappling with shrinking demand for its Eikon desktop terminals. One option is to package and sell more LSE data to Refinitiv customers. The former Goldman Sachs banker also sees scope for using Refinitiv’s statistics on environmental, social and governance - the current investment fad - to create new stock indices.
LSE shareholders appear to be giving him the benefit of the doubt. The company’s market value has risen by around a quarter - equivalent to about 5 billion pounds - since it confirmed talks last weekend. That raises the price for any rival which might be considering pouncing on LSE. It also adds to the pressure on Schwimmer to make sure his numbers add up.
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