DBRS Confirms Thomson Reuters Corporation’s Ratings at A (low) and R-1 (low), Stable Trend

DBRS has today confirmed its A (low), R-1 (low) and Pfd-2 (low) ratings on Thomson Reuters Corporation (Thomson Reuters or the Company). The trends are Stable. The confirmation is based on the Company’s balanced business risk profile, stemming from both product and geographic diversification, along with its healthy financial risk profile, which continues to improve organically and with strategic acquisitions. Furthermore, DBRS notes that Thomson Reuters’ operations continue to be more resilient to economic cycles, given the fact that its services are much more highly subscription-based (86% of total revenue) than those of its peers, including traditional advertising-based media companies.

Despite this resilience, DBRS notes that the economy, the state of the global capital markets, and a general move away from high-margin print services, in addition to the Company’s investment in new products, will more than offset growth in areas such as Tax & Accounting and Healthcare & Science in 2010. This has somewhat moderated Thomson Reuters’ long-term revenue and EBITDA growth rates in the short term.

DBRS believes that product launches in key segments such as Legal and Tax & Accounting (WestlawNext and OneSource) and its Markets division (Eikon) will help to solidify Thomson Reuters’ leading positions in these segments at a time when its competitors are generally feeling more pressure on their operations. Additionally, DBRS notes that the consolidation of the platforms that run these products continues. This has given segments such as Legal and Tax & Accounting core platforms that the Company plans to expand outside of its leading markets (United States, United Kingdom, Canada, etc.) and into markets such as Brazil, India and China. If successful, this could help to expand the Professional division’s global reach (87% of revenue generated from the Americas in 2009) and unlock further operating leverage. The Professional division generates strong EBITDA margins, at the 35% level.

For Thomson Reuters’ Markets division, a segment that is already very global (2009 revenue: 45% EMEA; 39% Americas and 16% Asia-Pacific), DBRS expects integration efforts from the 2008 acquisition of Reuters Group PLC to continue in 2010 and 2011. DBRS notes that the Company appears to be well on track to meet its expanded synergies target – $1.6 billion by the end of 2011, up from an original target of $1 billion when the deal was announced in May 2007. Despite these synergies, the Company plans to spend another $600 million in integration costs over the next two years – with 2010 being another heavy year at around $500 million – before integration spending tapers off and concludes in 2011. These integration efforts should continue to improve EBITDA margins in the Markets segment, from 27.3% today to possibly closer to the 30% level.

Given these factors in the Professional and Markets divisions, on a consolidated basis EBITDA is expected to be lower in 2010 (roughly flat, excluding investments in new products and three product launches) before returning to growth in 2011. DBRS believes that as a result of greater operating leverage and integration efforts, consolidated EBITDA margins could improve to above the 30% mark over the medium term. This would occur if the Company were successful in its platform consolidation and with its new product launches, which should solidify its leading market positions in its various operating segments.

DBRS notes that Thomson Reuters has maintained a healthy financial risk profile since the Reuters acquisition in April 2008, which has helped it to drive sizeable levels of free cash flow, healthy free cash flow yields and improved credit metrics. The Company’s credit metrics, such as net debt-to-EBITDA below 2.0 times, EBITDA interest coverage above 9.0 times and cash flow-to-debt at 0.39 times, are expected to remain around these levels and continue to support its A (low) rating. DBRS expects Thomson Reuters’ financial risk profile to remain stable, in light of its ability to direct its free cash flow of $800 million to $1 billion (after dividends) each year to small acquisitions, higher dividends and share repurchases. DBRS believes that the Company will continue to remain balanced in this manner going forward.

Overall, DBRS believes that Thomson Reuters’ ratings continue to be well placed at current levels, with both its business risk and financial risk profiles expected to remain relatively stable over the next couple of years. Once the aforementioned short-term factors that have affected growth rates dissipate and new products are launched, DBRS believes that Thomson Reuters should return to its revenue growth potential (mid-to-high single-digit growth rates over the long term) and EBITDA margin improvement over the medium to long term.

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

The applicable methodology is Publishing & Media, which can be found on our website under Methodologies.

This is a Corporate (Telecom/Media/Technology) rating.