In a US$17-billion deal, Blackstone Group LP will buy 55 per cent of the financial information and analytics arm of Thomson Reuters Corp.ANDREW KELLY/Reuters
It's being billed as a battle of the billionaires for financial-data supremacy.
In one corner, Stephen Schwarzman's private equity heavyweight Blackstone Group LP, with its US$17-billion deal to buy 55 per cent of the financial information and analytics arm of Thomson Reuters Corp. on Tuesday. In the other, computer-terminal tycoon and former New York mayor Michael Bloomberg's eponymous company.
But to hear the matchup described by the Canada Pension Plan Investment Board (CPPIB), which is backing Blackstone's deal as part of a consortium, the investment doesn't need to crush its competition to be a winner.
"We already think it's a global market leader of scale," said Ryan Selwood, head of direct private equity at CPPIB. The potential to consolidate the fragmented data-provider market also wasn't the major selling point, he said.
"We're focused on the thesis for this particular business. And we actually like the stability of the business, in terms of its significant existing install base, which generates recurring revenues and has very long-standing customer relationships that it enjoys," he said.
These steady revenues help the hefty US$14-billion new debt load the business has been saddled with make more sense. The Blackstone-led group is only writing a US$3-billion equity cheque to Thomson Reuters to buy control of the business, supported by CPPIB and Singaporean wealth fund GIC.
Supporting all that leverage, though, is a lot of cash. In 2016, Thomson Reuters said the financial and risk-business portfolio being acquired posted full-year revenues of US$6.1-billion. The revenue base skews toward subscription-based products, where financial pros pay predictable sums for access to data that's heavily integrated into their daily work flow.
At the same time, profits have been rising in recent years as management worked to overhaul the business. The unit posted US$1.8-billion in earnings before interest, taxes, depreciation and amortization (EBITDA) and US$1.2-billion in operating profit in 2016. That leaves enough free cash flow to service such a large debt.
CPPIB, which invests to pay Canadian pension benefits years in the future, places a lot of value on stability and businesses that generate predictable amounts of cash. CPPIB has found the proprietary and public data Thomson Reuters aggregates to be indispensable for banks and investors like itself that need to make big decisions quickly, Mr. Selwood said.
If the three institutional investors can coax even just a few percentage points more of profit growth out of the business in the coming years through new products, increased users and cost cutting – and pay down some bank debt along the way – it stands to reason the investors could add billions of dollars to their equity value when the business is next sold. Already, Thomson Reuters CEO Jim Smith has given indications that the company is at a turning point. He said on a conference call Tuesday night that the business had revenue growth in 2017 "for the first time since 2011."
Analysts are generally optimistic that Blackstone can wring better performance out of the division and CPPIB seems confident, too.
"We think this is a unique opportunity to broaden our portfolio and build scale in the financial data and technology sector, which we think has resilient underlying demand drivers that we expect to support the future growth of this business," Mr. Selwood said.
Blackstone invited CPPIB to be part of its consortium within the past six months and the pension fund was happy to come in alongside other investors it perceived as being well-capitalized and aligned with its interests.
Mr. Selwood was unwilling to say how much CPPIB invested in the deal, or whether they'd get one of Blackstone's five board seats for their efforts. But he said that the fund had no preconceived holding period set for the asset and would be an active steward of its investment.
Woodbridge Co. Ltd., the Thomson family holding company and controlling shareholder of Thomson Reuters, also owns The Globe and Mail.