The London Stock Exchange Group (LSEG) initially agreed to purchase Refinitiv back in August 2019 when it was cheered by shareholders who believed it would allow the LSEG to compete with larger rivals such as Bloomberg, Intercontinental Exchange and S&P Global in providing a range of services. Despite this, LSEG faced significant hurdles as a result of competition concerns from the EU competition watchdog. It was even reported a few months ago that LSEG was set to receive EU antitrust objections. The rationale behind this is that the Refinitiv deal would transform the conglomerate into one of the world’s largest capital markets infrastructure operators with substantial control of major exchanges, indices and data.
In an effort to attain regulatory approval, LSEG tweaked concessions to address the competition concerns, and in November LSEG offered to allow competitors unrestricted access to its clearing and data operations for the next 10 years. The offer was part of a large package of concessions, which also included LSEG’s recent sale of one of its largest subsidiaries, Borsa Italiana, to pan-European exchange Euronext. As a result of the adjustments, LSEG attained the go-ahead from EU antitrust authorities in January 2021 to finally complete its 27 billion USD acquisition of Refinitiv, bolstering its footprint in a rapidly consolidating sector. Margrethe Vestager, the executive vice-president in charge of competition at the European Commission (and who personally approved the deal) stated that the concessions meant that ‘the markets will remain open and competitive and the acquisition will not lead to higher prices or less choice.’
The acquirer, LSEG, is a global financial markets infrastructure business. Its diversified global business covers information services, capital formation, risk and balance sheet management. Through its platforms, the group offer market participants unparalleled access to European Capital Markets. The subsequent subject of the acquisition, Refinitiv, is a global provider of financial market data and infrastructure, serving over 40,000 institutions in over 190 countries. More specifically, Refinitiv provides financial software and risk solutions – delivering news, information and analytics, enabling transactions, and connecting the global community.
With regards to the strategic rationale behind pursuing the deal, the transaction brings together two highly complementary global businesses and transforms the LSEG’s position as a leading global financial markets infrastructure group, allowing it to benefit from global growth opportunities in existing and new geographies. More specifically, it expands the LSEG’s existing position in Asia (particularly China) and facilitates growth in emerging markets where Refinitiv has a significant presence. Furthermore, the transformational deal expands the LSEG’s and Refinitiv’s shared commitment to an Open Access philosophy and working in partnership with customers.
The transaction also presents a compelling financial profile with substantial synergies and sustainable growth. Firstly, it is expected that the combination will facilitate the realisation of annual run-rate revenue synergies in excess of 225 million GBP and annual run-rate cost synergies in excess of 350 million GBP. These synergies are separate from and in addition to Refinitiv’s previously announced and ongoing 650 million USD cost-savings programme. However, the costs to achieve synergies is estimated to be 550 million GBP (the majority of which is expected to be incurred in the first 2 years following completion). Additionally, the transaction enhances revenue mix by increasing the combined groups recurring subscription-based revenue from 40% to circa 70%, with attractive revenue growth of 5-7% compound annual growth rate (CAGR), targeted over the first 3 years post-completion. Finally, the deal also delivers enhanced returns for shareholders, with over 30% adjusted EPS accretion in the first full year post-completion and increasing in years 2 and 3.
It is worth noting that the combined LSEG and Refinitiv would still be eclipsed by financial data leader Bloomberg but will outrank the 44 billion USD merger between S&P Global and IHS Markit, which was announced late last year and is the largest acquisition of 2020. Similar to the LSE-Refinitiv deal, numerous other leading exchanges are also seeking to diversify into data and other services. In August 2020, LSE rival Intercontinental Exchange (ICE) acquired Ellie Mae for 11 billion USD and in November Deutsche Börse announced it would purchase 80% of Institutional Shareholder Services for 1.8 billion USD. Deutsche Börse also offered to buy Borsa Italiana, Italy’s only stock exchange, but lost to Euronext.
Overall, as highlighted by David Schwimmer, the LSEG’s Chief Executive, ‘LSEG is well-positioned for long-term sustainable growth in a rapidly evolving landscape as a leading global financial markets infrastructure and data provider”. Also, while the LSEG certainly faced significant hurdles throughout its journey to attain antitrust approval, the transaction has now been completed, which thereby significantly reduces the risks and uncertainties usually associated with mega-deals like this one. Finally, the combination allows LSEG and Refinitiv to keep pace with the industry’s race for scale and surging demand for data, while simultaneously providing attractive long-term returns through both cost and revenue synergies.
By Benjamin Towle
Sector Head: Venkat Rajasingham