DBRS Confirms Thomson Reuters’ Ratings at R-1 (low)/A (low), Stable Trends

DBRS has today confirmed its R-1 (low), A (low) and Pfd-2 (low) ratings on Thomson Reuters Corporation (Thomson Reuters or the Company). The trends are Stable. The confirmation is based on a balanced business risk profile stemming from product and geographic diversification along with a healthy financial risk profile that continues to improve both organically and with strategic acquisitions. DBRS notes that both the economy and the state of the global capital markets have somewhat moderated Thomson Reuters’ long-term revenue and EBITDA growth rates in the short term. However, Thomson Reuters’ operations continue to be much more resilient, given the largely subscription based nature of its services (86% of total revenue), versus a traditional advertising-based media company.

While the $17 billion acquisition of Reuters (closed on April 17, 2008) has increased
Thomson Reuters’ mix of exposure to the financial segment (Markets division) to roughly half of its total EBITDA at a point when the global capital markets and their participants are experiencing mixed results, DBRS notes that Thomson Reuters’ ratings reflect DBRS’s outlook for an entire business cycle. Furthermore, DBRS believes the added geographic, customer and market diversification factors in the Markets division – along with the opportunity to extract significant synergies – will mitigate these factors. The evidence of this diversity can been seen in the pro forma first quarter results of the Markets division that demonstrated flat operating profit with growth in Enterprise revenue offsetting revenue pressure in Media due to the economy.

However, the current state of the financial markets and the impact on Thomson Reuters’
Markets division customer base continues to be monitored by DBRS. To date, this has caused much less of an impact on the Company’s results relative to the major global financial market participants that make up its customer base. Furthermore, DBRS notes that since the last downturn in the financial sector earlier this decade, Thomson and Reuters have separately made significant changes to their product offering mix, and to a lesser extent contract terms, thus reducing their correlation to financial services headcount. Other factors have also improved on a relative basis, including improved product quality and expanded geographical diversity. While DBRS believes these are likely not sufficient to completely mitigate lost revenue due to user reductions, this feature will at least partially offset the impact of such declines.

DBRS notes that Thomson Reuters’s Markets division generates sizable EBITDA with growth (on a reported basis) driven by the Reuters acquisition. Additionally, EBITDA margins are currently reasonable in the mid-20% range with this likely improving to the upper-20% range in the next couple of years once the Reuters synergies are fully realized.

Once integration efforts have been completed (opex and capex), this division will drive very healthy free cash flow yields.

Further supporting Thomson Reuters’ A (low) rating is the robustness of its Professional segment (roughly the other half of total EBITDA). This segment continues to be anchored by its Legal division that generates over one-third of the Company’s total EBITDA. Despite some challenges for Thomson Reuters’ customers in the Legal segment caused by the economic downturn, this segment continues to drive the majority of the EBITDA growth for the Professional division while the smaller Tax & Accounting and Healthcare & Science segments drive modest EBITDA growth or are relatively stable. With mid-30% range EBITDA margins in Thomson Reuters’ Professional division (largely stemming from Legal’s nearly 40% EBITDA margins), this remains healthy and continues to be a large free cash flow generator for the Company as a whole.

DBRS notes that Thomson Reuters has maintained a healthy financial risk profile roughly a year after the Reuters acquisition which has helped it to drive both sizable levels of free cash flow, healthy free cash flow yields and credit metrics.

Credit metrics such as EBITDA interest coverage at nearly 9.0 times and cash flow-to-debt above the 0.35 times level are expected to remain stable and continue to support its A (low) rating. DBRS expects Thomson Reuters’ financial risk profile to remain stable with the ability to direct its free cash flow to small acquisitions, higher dividends and share repurchases. DBRS believes the Company will continue to remain balanced in this manner going forward.

DBRS notes that Thomson Reuters recently announced plans to collapse it dual-listed company (DLC) structure (plc shares to be exchanged for Corporation shares on a one-to-one ratio) has no impact on its ratings given that it is a share-for-share exchange. The Company did indicate it may partake in some share repurchases, however, these are solely with the intent to support the shares during this transaction.

Overall, DBRS believes that Thomson Reuters’ ratings continue to be well-placed at their current levels with both its business risk and financial risk profiles expected to remain relatively stable over the next couple of years. Any improvement in the economy and the global capital markets is expected to place Thomson Reuters back on its long term revenue and EBITDA growth targets (both 7% to 9% over the long term). In the near term, DBRS notes that merger synergies and organic growth should offset these cyclical pressures with these abating over the medium term.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Telecom/Media/Technology which can be found on our website under Methodologies.

This is a Corporate rating.