An enduring financial data powerhouse

LSEG is now essentially a data company, providing real-time financial intelligence for 45,000 banks, asset managers and newswires worldwide. It has done this for several years, but things stepped up a gear in 2021 when it completed the acquisition of analytics firm Refinitiv for $27bn (£21.2bn). Before the mega-deal, information services accounted for about 40 per cent of group sales. Today, they contribute over 70 per cent of the top line. 

Acquisition gamble 

This has radically changed LSEG’s investment case. Whereas it was once reliant on transaction volumes and IPO numbers, almost three-quarters of its income now comes from data subscriptions and licences, which last between 12 and 24 months and typically recur. As a result, it has started to bear more resemblance to financial tech companies such as Bloomberg and FactSet (US:FDS) than to traditional exchanges. 

For investors, this is doubly positive. “This different business mix will command a higher valuation as people increasingly believe in more sustainable and less volatile profitability growth,” reckons Russell Quelch, partner at Redburn Atlantic. 

Quelch’s argument is holding true: LSEG shares rose by 30 per cent last year despite a lack of sizeable earnings upgrades, and the stock now trades on a forward earnings multiple of 25. 

It is not all a matter of faith, of course. Tangible developments have also bolstered market sentiment. When LSEG bought Refinitiv, many investors were worried. The management team was relatively inexperienced when it came to tech – chief executive David Schwimmer has a banking background, while finance chief Anna Manz was fresh from chemical group Johnson Matthey when she arrived – and both the sums involved and corporate digestion required were huge.

The integration process has stayed on track, however. LSEG has achieved a mid to high single-digit growth rate since 2021, and figures for 2023 are expected to come in at the top of management’s 6 to 8 per cent range. It has also hit £368mn of cost savings, “already ahead of our original 2025 target”. 

Worries about liquidity are fading too. When LSEG bought Refinitiv, it could not afford an all-cash deal. As a result, it offered some of its own stock as payment, meaning Refinitiv shareholders – namely Blackstone and Thomson Reuters – ended up with a 37 per cent stake in the City grandee. They did not want to keep the shares, and a big chunk have since been sold through placements to institutional investors and offers to retail investors. 

Demand has been strong, however, and LSEG felt confident enough to buy some shares back itself. The unwanted stake is now much reduced, and analysts think the last of the shares will be sold in the first half of 2024, putting the matter of a stock overhang to bed once and for all.

Mighty Microsoft 

Among those who bought shares from the Blackstone/Thomson Reuters consortium was Microsoft (US:MSFT), which took a 4 per cent stake as part of a decade-long “strategic partnership”. Investors, including UK fund manager Nick Train, have stressed the importance of this tie-up – and rightly so. 

The ability to attract, retain and upsell customers, with the help of generative artificial intelligence, will be key to LSEG’s future growth, and management is already eyeing a range of new index, analytics and desktop products. Microsoft’s obvious expertise, and its ability to bring products to market, should enhance LSEG’s offering and keep it on its toes.

"LSEG needs to shift perception from being a drag on a user’s cost base to a provider of enterprise solutions that drives internal efficiencies for its customers across their workflows,” says Quelch. 

Do not get too carried away though. The ultimate size of the revenue opportunity is still unknown, and the tech giant also has partnerships – albeit less deep ones – with several other players. 

In the more immediate term, LSEG is facing various revenue and profit headwinds, including the loss of Credit Suisse as a client, a weaker dollar and the need to invest in new products. Some analysts also fear that the low-hanging fruit of the Refinitiv deal has now been picked and that there are harder yards ahead. “After a good year for the top line we expect some slowdown and only limited margin improvements in 2024,” analysts at Deutsche Bank concluded.

More urgent, however, is the fact that the Refinitiv integration is not complete. There are also sizeable and continuing discrepancies between adjusted and statutory profits: in the first half of 2023 alone LSEG reported £119mn of integration and restructuring costs and £570mn of costs relating to the amortisation and impairment of purchased intangible assets. In other words, there is still time for things to go wrong. 

This risk is exacerbated by c-suite churn. The chief financial officer is leaving her post next year, while the heads of the data analytics, FTSE Russell and risk intelligence arms have recently changed. Much rests on the shoulders of Schwimmer.

LSEG is at a crucial juncture. If growth stalls in 2024, spooked investors could knock the shares. On the other hand, the Refinitiv acquisition, together with the Microsoft deal, could ultimately prove transformational, securing LSEG’s position on the international stage and adding some sparkle to the UK market it embodies. We are feeling optimistic.