DBRS Confirms Thomson Reuters Corporation’s Issuer Rating at BBB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed Thomson Reuters Corporation’s (Thomson Reuters or the Company) Issuer Rating, Unsecured Debentures rating and Unsecured Medium-Term Notes rating at BBB (high) and Commercial Paper rating at R-2 (high) and Preferred Shares rating at Pfd-3 (high). All trends are Stable. The confirmations follow the announcement that the Company has signed a definitive agreement whereby Blackstone Group L.P. (Blackstone) will acquire a 55% stake in Thomson Reuters’s Financial and Risk (F&R) business, with Thomson Reuters retaining a 45% stake. The F&R assets will be rolled into a separate legal and operating entity with its own capital structure. Thomson Reuters will receive approximately $17.0 billion in gross proceeds at closing, funded by $14.0 billion of debt and preferred equity to be incurred by the newly created strategic partnership and $3.0 billion in a cash equity contribution by Blackstone. DBRS notes that debt issued by the new entity will be non-recourse to Thomson Reuters and that the Company will not be formally obligated to provide future capital contributions to the strategic partnership. The sale of F&R is subject to specified regulatory approval and customary closing conditions and is expected to close in the second half of 2018.

Thomson Reuters plans to use the $17.0 billion of gross proceeds from the transaction to (1) repurchase shares via a substantial issuer bid/tender offer (estimated between $9.0 billion and $11.0 billion), (2) pay down Thomson Reuters debt (estimated at $3.0 billion), (3) pursue organic and inorganic opportunities in the Company’s Legal and Tax and Accounting businesses (estimated between $1.0 billion and $3.0 billion) and (4) pay cash taxes, transaction expenses and other costs required to establish F&R as an independent entity (estimated at $1.5 billion to $2.5 billion).

The F&R business was the Company’s largest division, accounting for approximately $6.1 billion, or 54% of consolidated revenues, and $1.6 billion, or 55% of EBITDA, in 2016. The F&R business provides information and analytics to financial market professionals. While F&R enjoys strong brand recognition, is well diversified geographically and has a high level of recurring revenue (~85%), the segment has been amid a multi-year turnaround and faces an intensifying competitive landscape, particularly in the Europe, Middle East and Africa region (~40% of revenue), representing a significant challenge to generating positive long-term top-line growth within its current operating structure. Post-transaction, the stand-alone F&R business will be managed by Blackstone. Blackstone, a multinational private equity, alternative asset management and financial services firm with ~$434.0 billion of assets under management as at December 31, 2017, is a uniquely positioned and experienced strategic partner. Despite the aforementioned headwinds facing the F&R business globally, DBRS believes that Blackstone’s private and public market expertise, strong relationships with F&R’s client base, ability to adopt new or reconfigure service-delivery channels and expectation of launching innovative data-centric solutions outside the constraints of quarterly performance evaluations are likely to elevate the long-term growth rate above the segment’s performance over the last five years.

While, pro forma, Thomson Reuters will be less diversified in terms of operating verticals and geographic exposure, the per cent of recurring revenue is expected to increase modestly to ~88%, which is expected to mute potential fluctuations of future operating results through the business cycle. Leveraging its number-one or number-two market position in the Legal and Regulatory and Tax and Accounting verticals, DBRS believes Thomson Reuters has an opportunity to improve future growth rates compared with the last five years through analytical services innovation and improvements to the digital customer interface. Overall, DBRS believes there is a modest softening of the business risk profile of Thomson Reuters; however, the Company’s intention to invest $1.0 billion to $3.0 billion in key growth segments of its service portfolio through internally developed initiatives and acquisition activity may prove to be a mitigating factor over the medium to longer term. Additionally, Reuters News will remain part of Thomson Reuters and will enter into a 30-year news-content contract with the new entity with a minimum annual value of $325.0 million.

The financial risk profile of Thompson Reuters post–transaction close is expected to remain similar to the current entity. DBRS expects pro forma total debt-to-EBITDA to be at or below 2.5 times (x) within 12 months to 18 months after transaction closing, assuming the completion of the anticipated $3.0 billion debt repayment. Pro forma EBTIDA coverage is expected to remain above 7.0x and in line with recent levels. Similarly, cash flow from operations-to-debt, excluding one-time items (applicable taxes, legal expenses, transaction fees, etc.) related to the transaction, is expected to remain in the mid-20% range. The Company’s operating cash flow should adequately finance its capital expenditures (capex) and dividends (prior to dividend reinvestment plan (DRIP) participation). However, should the Company’s free cash flow profile post–capex and dividends (pre-DRIP) move to a meaningfully negative level for an extended period, the result would be negative pressure on the ratings.

The Company’s 45% ownership in F&R is expected to be reported as minority interest in Thomson Reuters’s consolidated results. As such, DBRS’s earnings and financial outlook does not explicitly incorporate earnings or rely on distributions from the newly created strategic partnership. Although the debt at the highly levered F&R entity will be non-recourse to Thomson Reuters and although there will be no mandatory future capital requirements from Thomson Reuters, it is in the Company’s interest for the F&R business to perform well and appreciate in value over the long term, as the investment will continue to represent a significant portion of the Company’s entity value.

DBRS believes that, taken together, the creation of a strategic partnership with Blackstone related to the F&R business, the forthcoming 30-year news-content contract, the proposed capital structure transactions and the Company’s continued prioritization of an acceptable level of leverage are sufficient to keep Thomson Reuters at its current ratings, although situated lower within the rating category. DBRS’s ratings continue to reflect the Company’s well-entrenched market position, the diverse nature of its customer base and strong free cash flow–generating capacity. The ratings also take into account intensifying competition, the need for constant innovation and the risks associated with the Company’s transformation. The Stable trends reflect Thomson Reuters’s operating expertise in the Legal and Tax and Accounting segments, high degree of revenue visibility and long-term anchor contract in news as well as DBRS’s favourable view on the future growth profile of the Company.

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

The principal methodology is Rating Companies in the Publishing Industry, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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