LONDON (Reuters Breakingviews) - David Schwimmer is making a bold break for independence. Almost exactly a year since he took charge of the London Stock Exchange Group, the former Goldman Sachs investment banker is hoping to finalise a $27 billion takeover of financial data provider Refinitiv. It’s a complex and highly leveraged attempt by the perennial takeover target to turn itself into a buyer instead.
The deal in the works, confirmed by the LSE on Saturday, required the alignment of financial stars. Thanks to a share price surge which has boosted its equity value by a quarter since October, LSE is now worth almost exactly as much, including debt, as it is proposing to pay for Refinitiv. But the target is burdened with borrowings of more than $12 billion, the result of last year’s partial buyout by a Blackstone-led consortium from Thomson Reuters, owner of Breakingviews. That capital structure enables the LSE to pay Refinitiv’s owners with shares worth less than $15 billion, giving them 37% of the enlarged UK company.
The transaction ticks three boxes for the LSE. First, it opens new growth opportunities in the interpretation and analysis of financial data - an area Schwimmer had earmarked for expansion. Second, it reduces the company’s dependence on stock market indexes and trades. These businesses have delivered much of the LSE’s recent growth, but face pressure from cost-conscious fund managers and European regulators. Finally, Refinitiv dilutes the LSE’s exposure to the United Kingdom amid the uncertainty over Britain’s exit from the European Union.
Yet the deal comes with substantial risks. The two companies’ net debt at the end of 2018 was more than four times last year’s combined EBITDA, Breakingviews calculates, after stripping out some one-off Refinitiv expenses. Bringing that ratio down depends on cost-cutting. Refinitiv’s private equity owners reckon they will produce savings of $650 million a year by the end of 2020, and Schwimmer has then pledged to slice a further $430 million or so off annual expenses, while integrating a much larger workforce. Refinitiv’s 18,500 employees outnumber the LSE’s by roughly four to one.
The short-term risk is that an interloper offers more for Refinitiv, or that a rival like Intercontinental Exchange or CME pounces on the LSE before its shareholders approve the deal. Longer term, the chief executive’s challenge will be proving that becoming a predator is as lucrative for investors as being potential prey.
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