With a US$17-billion deal to join forces with Thomson Reuters Corp., private equity giant Blackstone Group LP has thrust itself into the hot seat of a battle for supremacy in market data.
Thomson Reuters's financial and risk division is a heavyweight in financial data and analytics, with US$6.1-billion in yearly revenue. Yet meaningful gains in revenue or market share proved elusive for several years as the company retooled an unwieldy structure. Meanwhile, chief rival Bloomberg LP has used its popular data terminals to keep a tight grip on its position as the frontrunner on traders' and investors' desktops.
The deal struck on Tuesday is all about finding ways to grow the business more quickly. The agreement will spin the financial and risk division into a private company, with New York-based Blackstone taking a 55-per-cent stake after paying US$3-billion cash and releveraging the unit with US$14-billion in new debt. Numerous analysts are optimistic that Blackstone has the tools to squeeze better performance out of the division. But years of heavy lifting at Thomson Reuters have proven there's no simple path to success.
Excitement among investors that pushed Thomson Reuters's share price 7 per cent higher on Tuesday, before the deal was sealed, evaporated on Wednesday. Shares in the company fell 7.2 per cent on the Toronto Stock Exchange, to $53.23.
Woodbridge Co. Ltd., the Thomson family holding company and controlling shareholder of Thomson Reuters, also owns The Globe and Mail.
The plan to revitalize the financial and risk business hinges in no small part on Blackstone's deep network of contacts across the financial sector.
With US$387-billion in assets under management, the firm has sway with an array of businesses and is a major source of fees for investment banks. Its position in the financial services sector "means it has broader and deeper relationships" with clients, said Thomson Reuters chief executive officer Jim Smith, in a Tuesday interview. "I think that helps, competitively." Blackstone is also expected to take more risks with the business than Thomson Reuters could under public-company scrutiny, running it more aggressively under the cloak of a private company. That could lead to uneven results in the near term but pay off over time.
"Given the unsuitability of the public markets for volatile financial results, a private-company structure is better fitted for the [financial and risk] division," said Aravinda Galappatthige, an analyst at Canaccord Genuity Corp.
The private-equity firm is also likely to be more muscular when it comes to slashing costs. Thomson Reuters has already plucked the low-hanging fruit in the division, which bore the brunt of a US$200-million restructuring that shed some 2,000 jobs late last year. But on Tuesday, Mr. Smith made it clear there's more to trim.
"I think we saw a continued opportunity to go after the cost side and I don't think that Blackstone will disagree with the opportunity on the cost side," he said, on a conference call with analysts. "And they'll go after it the way they'll go after it."
That, in turn, could improve margins, providing Blackstone and Thomson Reuters, which is keeping a 45-per-cent stake, with a better return and more flexibility to reinvest in the business. A research note from analysts at Goldman Sachs Group Inc. predicts that Blackstone could find enough efficiencies to boost the company's EBITDA (earnings before interest, taxes, depreciation and amortization) margin from 31 per cent last year "to the mid-30s."
But the same analysts also caution that spurring meaningful growth without acquisitions "will be difficult to achieve over the near-to-intermediate term."
Thomson Reuters's competition with Bloomberg is often framed through the lens of their desktop data products, where Thomson Reuters trails despite efforts to revamp its flagship Eikon platform. But the company's data feeds business, which is wired into trading floors, accounts for an equally large share of financial and risk revenue. And its risk solutions have been in demand as companies around the world grapple with regulatory changes, including sweeping European financial reforms known as MiFID II.
"We saw a nice spurt in the month of December in terms of sales from people looking to make sure they have MiFID-compliant solutions in place," Mr. Smith said.
Thomson Reuters has also adopted an open stance, striking partnerships that allow applications made by other companies – such as the Symphony messaging platform, which competes with Bloomberg – to run on its platforms, in contrast to Bloomberg's more proprietary systems. And that appears to match well with Blackstone's long-term vision for investing in data and analytics.
Leading the deal for Blackstone is Martin Brand, a senior managing partner in the firm's private-equity group whose specialty is investing in financial institutions and technology. Mr. Brand could not be reached for an interview on Wednesday. But he told the Wall Street Journal that Blackstone sees data distribution and analytics as "a very fast-growing space" and the scope of Thomson Reuters's financial and risk division was attractive. "This is one of the very few data assets available at scale."
Blackstone already co-owns Ipreo – a smaller company providing financial services technology, data and analytics – with Goldman Sachs. "They thought they could have similar success on a larger scale with our assets," Mr. Smith said.
And the prospect that those businesses could eventually join forces is intriguing to some analysts. "We think there could be some strategic sense to integrating with [financial and risk], either merging or via partnership," Manav Patnaik, of Barclays Capital Inc. said.