Wednesday 31 January 2018
Once again, the Trust Principles designed to safeguard Reuters have figured in a multi-billion dollar corporate transaction - no less than the biggest shake-up since the Thomson family acquired Reuters ten years ago.
Then, the trustees who act as guardians of the Trust Principles nodded through the acquisition of Reuters by the Thomson organisation. The Trust Principles were judged to be no hindrance to the takeover and the Thomson family agreed to apply them to the entire business of the new Thomson Reuters corporation they controlled.
The trustees backed the deal and granted the family’s private investment company, Woodbridge, an exemption to a 15 per cent shareholding limit.
This time, the Trust Principles evidently pose a barrier to the $17 billion sale of a majority interest in the merged company’s largest division - the financial and risk unit formed from the legacy terminals and data businesses of Reuters and Thomson Financial. Coincidentally, the $17 billion being paid by Blackstone, America's largest private equity firm, matches the amount Thomson paid for Reuters in 2008.
“Consequential modifications,” thus far unspecified, to the Trust Principles have been agreed to allow the deal to be closed and will take effect when that occurs. It is expected to be in the second half of this year.
Thomson Reuters and the Thomson Reuters Founders Share Company, protector of Reuters’ editorial independence since the organisation was listed on the London and New York stock exchanges in 1984, have agreed to alter the Trust Principles (adopted in 1941 and amended in 1984) that guide the news reporting division and, since the acquisition, the merged corporation.
There will be no change in the commitment of Reuters News to “independence,” “freedom from bias,” and supplying “reliable news” in keeping with the Trust Principles, according to a source familiar with the matter quoted by Reuters in its report of the transaction. (The quotation marks are as in the Reuters report.)
The chairman of the Founders Share Company, Kim Williams, appointed only last month, is thus far silent on the matter.
Thomson Reuters CEO James Smith said in a Reuters interview: “The Trust Principles apply any place where we use the Reuters brand or a third party uses the Reuters brand in a product.”
Therefore the new F&R company will be free to brand its information feeds, products and services as “Reuters”.
Smith described the “strategic partnership” with Blackstone as “transformational”. In a message to staff, he wrote: “This is an incredibly exciting opportunity which we believe will maximize the value creation of F&R, unlock its future potential and strengthen its competitive position across financial markets.”
Implications for Reuters news agency proved the biggest sticking point during negotiations with Blackstone, which began in earnest last summer.
Reuters News supplies Thomson Reuters’ flagship terminal Eikon, which accounted for more than half of Thomson Reuters’ revenues in 2016, with headlines, stories and analysis. The news division will remain part of Thomson Reuters, as will the group’s more lucrative legal and tax and accounting divisions.
The new standalone financial and risk company, to be controlled by five Blackstone directors to Thomson Reuters’ four and one non-voting chief executive, will make annual payments of at least $325 million to Reuters to secure access to its news service for 30 years, equating to almost $10 billion. The payments will be adjusted for inflation.
Thomson Reuters chief financial officer Stephane Bello told an investor call that the yearly payment represented what F&R used to allocate to Reuters News plus “a tiny bit more”.
Reuters also earns revenue from the sale of news to broadcasters, websites, newspapers, and other media organisations around the world. In 2016, it earned $304 million from its media business.
News supplied to the media has been a losing proposition for years, however. It loses a dollar for every dollar of revenue, according to the Financial Times, which noted it has been in the red for more than a decade.
Smith told staff: “For Reuters, the news agreement with Blackstone will ensure continued support and presence for the world’s most respected news organization. F&R will continue to be the principal customer for Reuters under a 30-year agreement for news and editorial content.
“We live in a time in which trusted news has never been more important and yet has never been harder to sustain as a business. I could not be more pleased to know that Reuters will continue to shine, operating with the same editorial independence and rigor, and ever greater commercial viability.”
The new partnership will take some work and there will be uncertainty during the transition, Smith acknowledged. He told analysts in an investor call that there was room for more cost cuts in the new F&R business.
“Upon closing of the transaction, we expect that our global workforce will roughly split in half. About 22,000 colleagues will transfer from Thomson Reuters to the new partnership. This includes about 16,000 people in F&R and about 6,000 people across the corporate functions to support the partnership,” he told staff.
“Whether your role will remain with Thomson Reuters or move as part of the new partnership, the future for both entities is bright. These are dynamic, well-run global businesses that will continue to offer interesting and impactful professional opportunities to shape the industries we serve.
“That being said, our entire leadership team appreciates the apprehension that uncertainty can cause and we pledge to ensure the process is completed quickly and transparently. All employees who will be moving to the new partnership will be notified by the end of the first quarter.”
Pre-merger Reuters dominated the financial information sector. But Thomson Reuters struggled to meet the challenge of arch-rival Bloomberg, whose market share has overtaken it to become the market leader, according to independent analysts.
Bloomberg itself wrote in a commentary on the transaction: “It will take some heavy lifting for Blackstone to make this deal a success… To ensure respectable returns, it'll need to increase the unit's earnings power, likely through substantial cost cuts. That itself may be a challenge, considering that Thomson Reuters has been trying to keep a lid on expenses through ‘simplification initiatives’ including job cuts and reducing the number of subsidiaries in its legal structure. Plus, operating expenses may actually climb as the company is on the hook for minimum annual payments of $325 million for the next 30 years in exchange for Reuters news content…
“Under any circumstances, a successful exit from a private equity investment is far from guaranteed. But as we learned during the [global financial] crisis, leveraged buyouts can swiftly become a risky business when conditions take a turn for the worse. In a recession, stock market selloffs cause valuations to retreat and the cost of debt financing skyrockets, factors that may outweigh any improvement in the company's earnings.”
It added that, although it's arguable that the next downturn may not be quite as extreme, it's indeed possible that Blackstone may have little choice but to sell the company at a lower multiple at some point in the future.
Two of Blackstone’s institutional investors - the Canada Pension Plan Investment Board and Singapore’s state fund GIC - will invest in the leveraged buyout. The size of their stakes in the new partnership was not disclosed.
Blackstone has deep pockets. Its assets under management of more than $385 billion “help secure the benefits of 29 million pensioners in the United States and millions more internationally, and advance the goals of charitable organizations, academic institutions and governments around the world”.
What the deal means for Thomson Reuters pension plans is uncertain. In the UK, it has four pension schemes. In the call with investment analysts, CFO Bello said two would move to the new joint venture with Blackstone and that cash has been set aside to top up schemes. He did not specify which ones.
Thomson Reuters intends to use the bulk of the proceeds from the transaction, estimated at $9 billion to $11 billion, to buy back shares. It will also pay down debt and invest in its legal and tax and accounting units and make selective acquisitions.
Since 2012, the Thomson family has reduced the number of products within F&R by about 70 per cent and shrunk the division’s workforce by 25 per cent. It has also sold “non-core assets” such as its intellectual property and science and healthcare businesses.
Woodbridge, Thomson Reuters’ principal shareholder, intends to keep its 64 per cent ownership.
In the FT, a Lex column headlined “Thomson Reuters: rocked dove” noted times are tough enough for financial data providers, including Bloomberg, and speculated that after the financial and risk deal - “one wonders if a break-up of the larger group looms”.
Lex said the investment may be no bargain. It could start to look costly if persistent rumours that Bloomberg has been cutting prices for its own terminals turn out to be true.
Another worry will be how to exit from a 55 per cent holding of one part of a larger group. The answer will be to spin out the entire unit in an IPO, presumably when business looks better. Given that Thomson paid roughly $17bn for Reuters more than a decade ago, it will hope for a higher premium to Blackstone’s valuation.
“A spin-off would put paid to the Thomson family’s decade-long hopes for combining a media business with financial services. Expect the F&R unit to fly the coop eventually.”