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Morningstar | Thomson Reuters Emerges From Its Divestiture a Stronger, More Nimble Company

Now that Thomson Reuters has shed 55% of its finance and risk business, it can get to work investing in its higher-return businesses in legal data and accounting software. Going forward, the company will be divided into five segments: Legal Professionals, Corporates, Tax Professionals, Reuters News, and Global Print. The company no longer reports its results based on products but on customer type. Legal professionals now accounts for more than half of the company’s operating income. Given Thomson Reuters’ balance sheet’s newfound flexibility after the divestiture, we would expect the company to make tuck-in acquisitions that can be sold across its client base. In the short run, this is probably the company’s easiest path to accelerating growth. That said, within Legal, Thomson Reuters’ sales to the U.S. government have been accelerating as a result of the company’s Investigations and Public Records products. We anticipate this growth in sales to government entities will persist while increasing its contribution to the company’s overall consolidated results. Investors should not sleep on the performance of Refinitiv and Tradeweb, the carve-out’s previously hidden asset that operates a rapidly growing fixed income exchange. After Tradeweb’s initial public offering, it appears Blackstone has been able to unlock significant value in Refinitiv. Prior to the IPO, Thomson Reuters indirectly owned a 22.5% stake in rapidly growing Tradeweb. In addition, Refinitiv will continue to benefit from Tradeweb as Refinitiv entered into a tax receivable agreement. This agreement will likely result in Tradeweb continuing to make large cash payments to Refinitiv. Finally, much of Thomson Reuters’ near-term success will be determined by its ability to increase margins resulting from restructuring after the Refinitiv transaction. In 2019, the company expects $330 million in one-time costs that it intends to eliminate by 2020. Though we believe Thomson Reuters can increase operating margins substantially, we hope the company doesn’t sacrifice investment in new products for near-term gains in profitability.