July 19, 2018

Breakingviews: Blackstone – Doubling Down

by Breakingviews.

Blackstone is taking out an insurance policy of sorts in its takeover of Thomson Reuters’ financial-data division. The $20 billion buyout comes with features that enhance the Canadian seller’s upside if things go well, but leaves it with relatively more of the downside if they don’t.

Steve Schwarzman’s investment firm is injecting $3 billion of equity alongside some co-investors to buy a 55 percent share of the Financial and Risk unit (F&R), now known as Refinitiv. Thomson Reuters, the parent company of Reuters, which includes Reuters Breakingviews, will keep a $2.5 billion stake. Blackstone also puts in $1 billion through preferred shares, public documents filed in February show – which behave largely like debt but aren’t treated like it by credit-ratings firms. They pay a 14.5 percent coupon in the form of more preferred shares.

The first layer of protection against having struck a deal at an unfavorable price goes to Thomson Reuters. By remaining a 45 percent owner, it ensures that if Blackstone makes a success of things, it reaps some of the gains. There is another mechanism, too, to spare the company controlled by Canada’s wealthiest family from suggestions they sold on the cheap: if Blackstone’s annualized return beats 20 percent, Thomson Reuters’ stake rises to 47.6 percent.

The maths works like this. If F&R’s enterprise value rises from $20 billion to $30 billion over five years, not factoring in any early repayment of debt or other financial engineering, Blackstone will make a total profit of almost 150 percent, according to Breakingviews calculations. But Thomson Reuters will do better, with nearly 165 percent. The bigger F&R grows, the more the original owner’s return will outpace Blackstone’s.

In a downturn, though, Blackstone in effect has double insurance. If its annualized return doesn’t hit 16 percent, its own stake in F&R automatically inflates, to 57.1 percent, at Thomson Reuters’ expense. What’s more, those preferred shares will have kept on gathering interest. After two years, the magic of compounding would mean the original $1 billion would be repayable as almost $2 billion.

The upshot is that if F&R doesn’t grow, its original owner will shoulder a disproportionate share of the pain. With no change in the company’s value after five years, Blackstone would make a pedestrian 14 percent profit. Thomson Reuters’ investment, though, would show a 22 percent loss. The difference widens the more F&R’s value falls. The Canadians have a real incentive to make their partnership work.


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