LSE Puts a Ring of Steel Around Its Refinitiv Deal

(Bloomberg Opinion) -- London Stock Exchange Group Plc has put another obstacle in the way of any bidder looking to buy the venerable bourse and stop its proposed $27 billion purchase of Refinitiv.

On Thursday, LSE shares leapt again after the exchange confirmed its plans to buy the financial data provider and give its owners Blackstone Group LP and Thomson Reuters Corp. a 37% stake in the enlarged company. LSE stock is now 25% above its price before the transaction became public last week, lifting the company's market value by about 5 billion pounds ($6.1 billion).

It was already clear that the LSE is buying Refinitiv (which competes with Bloomberg LP, the parent of Bloomberg News) at an attractive valuation multiple. But there is some justification for renewed enthusiasm. LSE said it could reap 225 million pounds of annual revenue gains from the tie-up within five years, on top of the already announced 350 million pounds of cost savings.

Assume a 50% margin on those extra sales and the financial benefits of the deal jump to more than 450 million pounds annually. Allow for integration costs and the long wait for full delivery and this uplift is worth perhaps 4 billion pounds, and will be shared with Blackstone and Thomson.

Everything else about the transaction could be expected to exert a downward force on LSE's stock price: It's big, it's different, it dilutes revenue growth and it will push leverage above three times Ebitda, normally a red line for shareholders. Returns look humdrum.

If the cost synergies are convincing, the revenue profile of the combination is less easy to be sure about. Refinitiv, whose products include the Eikon terminal, is a mix of mature and growing businesses. LSE says the enlarged group's sales will grow between 5% and 7% in the first three years after the deal closes. The bottom end of that range would represent something of a come-down for LSE, which grew revenue by 9% last year.

Still, Thursday's reaction suggests investors are relaxed about all this. They may also be giving LSE some credit for moving to a more predictable revenue base. Recurring income will account for about 69% of LSE's total, up from 39%. And rather than fret about leverage, shareholders appear to be welcoming the earnings uplift from taking on debt.

Analysts at Berenberg suggest CME Group Inc. and Intercontinental Exchange Inc. could be potential interlopers. They face a challenge. The rise in LSE's stock over the last week is already close to the typical premium that would be demanded in a traditional takeover and investors could expect further gains if things go really well.

A 198 million-pound break fee is no deterrent – but the approval timetable is. The LSE has chosen to hold its own shareholder vote on the deal before the year-end. If investors say yes, the exchange has to buy Refinitiv once regulatory approval comes through, assuming there's no cunning legal get-out. That gives only a four-month window for any alternative deal to emerge.

True, that sounds like a long time. But it forces interlopers to make a decision about buying the LSE at a time when the U.K.'s relationship with Europe is highly uncertain. That may give them pause. The LSE could have chosen to hold the shareholder vote after regulatory approvals were received – but a canny vendor like Blackstone would hardly have been willing to give the LSE a free option on the deal for more than a year. Still, December seems very soon. An interesting few months lie ahead.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.