For Thomson Reuters Corp., the market's ambivalent reaction to its blockbuster deal with Blackstone Group LP may have been a classic case of "buy on rumour, sell on news."
Having surged about 7 per cent on Tuesday after news broke that a deal with Blackstone was brewing, Thomson Reuters' shares promptly skidded by a similar amount on Wednesday, when investors got their first crack at the shares following the official announcement. They finished Wednesday at $53.23 on the Toronto Stock Exchange, down 36 cents from the $53.59 they had fetched 48 hours earlier.
But while Thomson Reuters' stock price has barely changed, the company is about to undergo a profound transformation – one that is drawing mixed reviews from analysts.
Under the deal, the New York-based company is selling a 55-per-cent stake in its financial and risk (F&R) unit to a group led by private-equity firm Blackstone. The consortium also includes the Canada Pension Plan Investment Board and Singaporean sovereign wealth fund GIC.
In return, Thomson Reuters will receive US$17-billion in cash, of which US$9-billion to US$11-billion is expected to be used for share repurchases. Woodbridge Co. Ltd., the Thomson family holding company that currently owns about 64 per cent of Thomson Reuters, plans to participate in the buyback and expects to maintain an ownership stake of 50 per cent to 60 per cent. (Woodbridge also owns The Globe and Mail.)
Analysts said the deal has several benefits for Thomson Reuters, which will retain a 45-per-cent stake in the F&R unit. Thomson Reuters will also keep its existing legal, tax and accounting businesses, as well as its Reuters News division.
"We see why the deal makes sense. As a private company, F&R can more aggressively and freely pursue investments to accelerate growth, with the deeper/broader relationships at Blackstone serving as a propellant," Credit Suisse analyst Anjaneya Singh said in a note.
What's more, the joint venture will allow Thomson Reuters to focus on high-growth areas of its other businesses, "which have been somewhat underappreciated by investors in light of the F&R focus," he said.
However, noting that the deal "does not appear accretive in the near-term," Mr. Singh reiterated a "neutral" rating on Thomson Reuters shares. He also maintained his US$51 price target.
A handful of other brokerages reduced their price targets. National Bank cut its rating on Thomson Reuters to "sector perform" from "outperform."
"We've opted to downgrade TRI as we look for a lot of dust to settle over coming months," National Bank analyst Adam Shine said in a note, citing – among other factors – "leakage related to cash taxes, transaction costs, and other expenses to establish F&R as a standalone company."
Some analysts were more upbeat.
Robert Bek of CIBC World Markets called the transaction a "win-win for TRI as it has derisked itself (while aligning with a strong player that may be able to help accelerate growth at F&R), increased financial and strategic flexibility, and unlocked some hidden value in shares."
Mr. Bek also raised his 12- to 18-month price target on Thomson Reuters to US$49 from US$47. The shares, which are interlisted on Canadian and U.S. markets, closed Wednesday at US$43.31 on the New York Stock Exchange.
Generating growth from Thomson Reuters' financial and risk unit has been a challenge, not least because it faces a formidable competitor in market leader Bloomberg LP. With Blackstone's financial muscle and global connections, the business will be in a better position to grow, analysts said.
"Given the growth headwinds facing F&R over the past decade, we view this transaction as 'moving the puck forward' with respect to changing the F&R status quo and refocusing the overall asset mix on higher-growth end markets," RBC Dominion Securities analyst Drew McReynolds said in a note.
Still, Mr. McReynolds said Thomson Reuters' share price "largely reflects the strategic and financial benefits" of the transaction. But he added that "we would be buyers on any material weakness" in Thomson Reuters' shares, while leaving both his "sector perform" rating and US$48 price target unchanged.