DBRS Confirms Thomson Reuters at A (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 for 2010) than those of its peers, including traditional advertising-based media companies.

While not immune to changes in the economy, the state of the global capital markets, and a general move away from legacy high-margin print revenue in some of its businesses, Thomson Reuters continues to invest in its products while optimizing its portfolio of services – including an announcement in June 2011 to sell its Healthcare business. This optimization continues to benefit the Company in diversifying its portfolio of services and its geographic exposure.

While Thomson Reuters pursues a rigorous approach of continually evaluating its businesses, DBRS notes that 2011 appears to be a more meaningful year for tactical acquisitions and disposals (with more disposals than acquisitions to date). As gross proceeds from these divestitures are meaningful – likely above $2 billion expected by the end of 2011 – a good portion has been used for acquisitions ($700 million year to date to June 30, 2011). Despite the net loss of revenue and earnings from these businesses, DBRS expects EBITDA to be higher for 2011 (versus 2010) with additional operating efficiencies, acquired businesses and lower costs after meaningful new product launches in 2010.

Additionally, DBRS notes that in early July 2011, the Company announced the streamlining of its Markets division in an attempt to better position this division for growth following the near-completion of the Reuters integration and related synergies ($1.7 billion of run-rate aggregate synergies to be completed by the end of 2011).

DBRS believes that as a result of greater operating leverage and integration efforts, consolidated EBITDA margins could improve to closer to 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 around 9.0 times and cash flow-to-debt at just below 0.40 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, including re-deploying net proceeds from its tactical dispositions and acquisition undertaken in 2011.

Overall, DBRS believes that the Company’s 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. Following the launch of new services in 2010, the completion of Reuters synergies by the end of 2011, and the re-deployment of sale proceeds, DBRS believes that Thomson Reuters should return to its revenue growth potential (mid-single-digit organic growth rates over the long term) and achieve EBITDA margin improvement over the medium to long term with additional efficiencies and operating leverage benefits.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating the Newspaper and Magazine Publishing Industry, which can be found on our website under Methodologies.