Breakingviews - Thomson Reuters beats Blackstone in Refinitiv deal

A Thomson Reuters logo is pictured on a building during the World Economic Forum (WEF) annual meeting in Davos, Switzerland January 25, 2018.

HONG KONG (Reuters Breakingviews) - When Blackstone bought a majority stake in Thomson Reuters’ financial data business last year, it found two ways to minimise its risk. First, it used debt financing so that its consortium of investors only needed to put up a small amount of equity – just under one-third of the total $20 billion price. It also added an insurance policy of sorts that would reduce its downside if things didn’t go well. If the London Stock Exchange’s takeover of Refinitiv goes ahead, that bet will pay off – but not in Blackstone’s favour.

LSE boss David Schwimmer is offering Refinitiv shareholders 37% of the company he wants to create. Based on the exchange operator’s market value on Friday, when talks with Refinitiv were disclosed, that stake was worth $14 billion. The subsequent jump in LSE shares lifted it to $17.5 billion by Thursday. The use of debt to finance the original Refinitiv buyout magnifies the gains for the investors, which include Breakingviews parent Thomson Reuters. Last year they put in a total of just $6.5 billion in equity and equity-like securities.

If the deal closes next year as planned, Blackstone and its co-investors, Singapore’s GIC and the Canada Pension Plan Investment Board, will have done very well for not quite two years’ work. So will Thomson Reuters, which owns 45% of Refinitiv. But the gains aren’t spread equally. Blackstone supplemented its equity in Refinitiv with warrants and preferred shares. If the buyout fared poorly, these instruments would increase the private equity group’s share of Refinitiv at Thomson Reuters’ expense. However, if the deal performed well, Thomson Reuters’ share would rise instead.

The upshot is that if the LSE deal goes ahead, Thomson Reuters comes out on top. Blackstone’s side will emerge with just under 22% of an enlarged company worth a total of $47 billion, based on Breakingviews calculations using the LSE’s share price on Thursday morning. The firm led by Stephen Schwarzman would have grown its $4 billion investment by a factor of 2.5 times. But Thomson Reuters will exchange its initial $2.5 billion holding for a 15% stake in the LSE worth $7.3 billion – almost triple what it put in.

That’s not money in the bank. Both Blackstone and Thomson Reuters won’t be able to sell any LSE shares until at least 2022, under the terms of what both sides call a “relationship agreement”. Some shares will be handed to Refinitiv executives as an incentive to stick around. And by proposing the deal, the LSE may have sent out a beacon to those who would like to take over the UK exchange themselves. Thomson Reuters may have beaten Blackstone by a whisker – the question is whether it can collect the prize.


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