DBRS Confirms Thomson Reuters at A (low), R-1 (low) and Pfd-2 (low), Stable Trend

DBRS has today confirmed its A (low), R-1 (low) and Pfd-2 (low) ratings with Stable trends on Thomson Reuters Corporation (Thomson Reuters or the Company). The ratings continue to be supported by the Company’s predominantly subscription-based revenue model and the diverse nature of its customer base. The ratings also reflect intensifying competition in key segments and risks associated with the Company’s acquisition and divesture program.

Thomson Reuters’ earnings profile remains reasonable for its current rating categories. Total revenues increased by 5.6% to $13.8 billion in 2011 based on organic growth of approximately 2% and acquisitions contributing 3% to top-line growth. EBITDA margins improved 97 bp to 28.4% in 2011, due primarily to operating leverage and savings from efficiency initiatives. In terms of financial profile, cash flow from operations continued to track operating income, capex remained stable and dividends increased moderately in 2011, resulting in free cash flow generation of $877 million, from $805 million in 2010. Thomson Reuters undertook 39 acquisitions for a total of $1.3 billion in 2011, with approximately two-thirds of investment occurring outside the U.S. Thomson Reuters also repurchased $326 million worth of shares during the period, its first share repurchase since 2008. As such, net debt increased moderately; however, net-debt to EBITDA decreased to 1.83x at the end of 2011, from 1.91x a year earlier.

Going forward, DBRS believes Thomson Reuters’ main challenge will be to achieve revenue and margin growth through the selection and integration of strategic acquisitions. The Company’s ability to grow profitably through this strategy remains to be proven. DBRS forecasts net revenues to remain flat in 2012, as revenue increases from successful acquisitions are expected to be offset by at least two more quarters of negative sales growth in the Finance & Risk segment. In terms of financial profile, DBRS expects Thomson Reuters to remain stable on the strength of its free cash generating capacity. Cash flow from operations and capex are expected to remain stable, while dividends are expected to steadily increase. Thomson Reuters has also closed ~$1.7 billion in divestitures of non-core businesses and expects to dispose of $200 million at some point this year. The Company will use the proceeds to fund acquisitions in growing market segments, though the timing of such remains uncertain. DBRS believes Thomson Reuters will use free cash flow, cash on hand and debt to complete share repurchases in 2012, while maintaining credit metrics consistent with the current rating category. Should Thomson Reuters’ credit metrics deteriorate through 2012 (i.e., debt-to-EBITDA meaningfully above 2.0x) as a result of softness in earnings performance and/or increased leverage, a negative trend could result.

Notes:
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.