Report
Colin Plunkett
EUR 850.00 For Business Accounts Only

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.
Underlying
Thomson Reuters

Thomson Reuters provides source of news and information. Co. operates three business: Financial & Risk, a provider of news, information and analytics, enabling transactions and connecting communities of trading, investment, financial and corporate professionals, as well as a provider of regulatory and operational risk management solutions; Legal, a provider of online and print information, decision tools, software and services that support legal, investigation, business and government professionals; and Tax & Accounting, a provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Colin Plunkett

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