The London Stock Exchange has a graveyard of past merger attempts. Here's why the $27 billion Refinitiv deal may be a winning bet.
- The London Stock Exchange is in advanced talks to buy Refinitiv, the financial-data company behind Eikon terminals, in a $27 billion deal.
- The stock-exchange operator failed to merge with German rival Deutsche Boerse after regulators blocked the tie-up, citing competition concerns.
- While Deutsche boasts bigger profit margins, carries far less debt, and offered greater potential synergies, the Refinitiv deal has a better chance of winning regulatory approval.
The London Stock Exchange is in advanced talks to acquire Refinitiv, the financial-data company behind Eikon terminals, in a $27 billion (R80 billion) deal. While Refinitiv pales in comparison to Deutsche Boerse - a rival German stock-exchange operator that LSE tried to merge with - in some respects, the takeover has a greater chance of success.
The 200-plus-year-old LSE has tried a few times, and failed, to merge with Deutsche. It also tried to tie up with TMX, owner of the Toronto Stock Exchange, back in 2011. That failed too.
Now, the LSE is close to striking a deal with a private-equity consortium led by Blackstone, which bought a majority stake in Refinitiv from Thomson Reuters around 18 months ago. The stock-exchange operator tried to merge with Deutsche in a $26 billion deal in March 2016, but Margrethe Vestager - the EU competition regulator - blocked the transaction a year later after determining that combining the London and Frankfurt exchanges would "create a de facto monopoly in the crucial area of fixed income instruments."
The two deals aren't perfectly comparable due to the difference in timing, but there are some interesting parallels. For example, the scale is similar - $27 billion for Refinitiv and $26 billion for Deutsche at current exchange rates.
Refinitiv generated twice the sales of Deutsche last year, but its profit margin was half the size. It earned about $6.3 billion in revenue and $1.6 billion in profits last year, while Deutsche posted about $3.1 billion in revenue and $1.9 billion in profits.
Deutsche showed robust growth last year with a 13% rise in revenue, although a sharper rise in operating costs meant profits fell 6%. Comparable figures for Refinitiv aren't available, but former parent company Thomson Reuters managed only 4% growth in revenues and stomached a 25% drop in operating profits last year.
There's a big difference in debt piles. Refinitiv's net debt stood at $12.5 billion at the end of last year, while Deutsche reported net debt of $1.8 billion. Unsurprisingly given the similarities between the two businesses, Deutsche also offered more cost savings. LSE expected to realise $500 million in annual cost savings in the three years after the deal closed, while it predicts about $430 million in five years from the Refinitiv transaction.
Refinitiv is less profitable, more indebted, and promises fewer synergies for LSE than Deutsche did. However, it's a more realistic acquisition. While EU regulators have repeatedly vetoed a tie-up between LSE and Deutsche due to the impact it would have on the continent's other exchanges, a merger between LSE and Refinitiv would likely mean fiercer competition for Bloomberg, S&P Global, and others in the financial-data space.
LSE seems to have refined its thinking by targeting Refinitiv. Regulators are likely to reward it.