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Morningstar | After Shedding Its Financial Business, Thomson Reuters Emerges as a Leaner Company Able to Grow

Once Thomson Reuters sheds 55% of its financial and risk business, or F&R, we believe this will result in a stronger business with a better balance sheet, enabling the firm to focus on its two more attractive businesses in legal databases and accounting software. We suspect that inefficiencies within F&R dominated management’s efforts, and the firm’s easiest avenue for growth was to cut costs and eliminate redundancies from the 200-plus acquisitions it made in the previous decade. In our opinion, F&R proved to be a huge distraction and detracted from the firm’s strengths in legal and tax.It should not be understated how inefficient Thomson Reuters is compared with its peers. In general, we view data businesses as requiring substantially less ongoing investment than other industries, but that’s not the case with Thomson Reuters. Despite having revenue more than 80% greater than its closest competitor (S&P), Thomson Reuters’ capital expenditures are more than 6.5 times the size. Thomson reinvests 8.4% of its sales into capital expenditures, while S&P reinvests only 2%. We suspect Thomson is supporting many legacy products across disparate systems that if it chose to discontinue, the firm would likely see significant client exodus. After divesting part of F&R, the company will have help shouldering this capital expenditures burden. We believe this deal makes Thomson Reuters a substantially less capital-intensive business. This is the main reason we believe this deal will be accretive to shareholders.Going forward, Thomson Reuters will be three segments: legal, tax and accounting, and news. We anticipate that Thomson’s remaining stake in F&R will account for about 10% of operating income while continuing to decline to an upper-single-digit percentage of operating income. Despite Blackstone’s acquisition and some fanfare around the deal, we still believe F&R is a business in a slow decline. We are concerned that Blackstone is adding significant leverage to the business. It is conceivable that if the decline is faster than we expect, the joint venture could become insolvent. Even if this were to happen, we believe Thomson will still be able to maintain its dividend.