Thomson attractively valued for growth and income

Investors have greeted blue chip stock Thomson Reuters’ new strategic partnership with Blackstone with little enthusiasm. But the deal improves Thomson’s asset mix and growth prospects and we view the pullback in the stock’s price as a buying opportunity.

Growth_and_IncomeThomson Reuters’ (TSX—TRI) new strategic partnership for its financial and risk (F&R) business has drawn mixed reaction. On January 30, when the company announced the partnership, the shares rose just over seven per cent to close above $57. Then investors had second thoughts, and sent the shares back down on the following day to close just above $53. Since then, the stock has drifted down further with the rest of the market.

TRI is a global leading source of news and information for professional markets. The company has operated in more than 100 countries for more than 100 years.

Thomson has entered into a strategic partnership with a consortium led by Blackstone, one of the world’s leading investment firms. As part of the transaction, Thomson will sell a 55-per-cent majority stake in its F&R business to private equity funds managed by Blackstone.

The transaction values the F&R business at about $20 billion. Thomson Reuters will receive about $17 billion at closing, funded by $14 billion of debt and preferred equity to be incurred by the partnership. It will also receive a $3-billion cash equity contribution by Blackstone. And it will retain a 45-per-cent interest in the F&R business.

Thomson will maintain full ownership of its legal, tax and accounting units, and its Reuters news businesses. F&R will also enter into a 30-year agreement to secure access to news services provided by Reuters for a minimum of $325 million annually.

Deal should strengthen F&R

The deal is meant to strengthen F&R, which provides a broad range of information services for financial market professionals, such as fundamentals, estimates and primary and secondary research. As an investment firm that has participated in similar businesses, Blackstone has the skill-set to accelerate F&R’s growth. It will help F&R provide new products and services, drive efficiencies, and navigate ongoing industry consolidation, according to Jim Smith, president and chief executive officer of Thomson.

But the deal has not gone without criticism. Some analysts have argued it makes Thomson a smaller, less diverse company with more concentrated risk. What’s more, the company will have difficulty maintaining its current dividend, given that its revenues will be cut roughly in half.

While the deal does entail risk, in our view it’s a step forward for Thomson, as the company will improve its asset mix and growth prospects. After six years of turning the F&R business around, Mr. Smith had become confident the company could grow the business, but was less certain as to how to accelerate growth. The Blackstone partnership offers a way to achieve that goal.

TRI shareholders will benefit from new partnership

Thomson Reuters will receive an estimated $17 billion from its strategic partnership with Blackstone. Here’s how the company plans to use the money to benefit shareholders:

■ It will pay down enough debt to let it remain below its target net debt-to-EBITDA leverage ratio of 2.5;

■ It will pay cash taxes, transaction and other costs required to establish F&R as a standalone company;

■ It will pursue organic and inorganic growth opportunities in the key growth segments of its legal and tax and accounting businesses; and

■ It will repurchase shares via a substantial issuer bid/tender offer made to all common shareholders.

With the pullback in Thomson shares, we find this blue chip stock attractively valued for growth and income if you can tolerate the uncertainty of its Blackstone partnership.

This is an edited version of an article that was originally published for subscribers in the February 23, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

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