The Refinitiv business is losing some of its luster to LSE as challenges grow

For thousands of traders, fund managers and analysts, the message that Eikon has fallen has become a familiar strain in recent months.

With its orange and black exchange screens, Refinitiv’s flagship product has been blocked for the past three decades in battle with Bloomberg terminals to become the market’s leading data and news provider in the capitals. financial world.

A disruption to Eikon last Wednesday was the third major interruption since April, a period full of smaller ones. In addition to testing users ’patience, the incidents deepened the pressure on the London Stock Exchange Group. The FTSE 100 company has agreed to buy Refinitiv in a $ 27 billion deal in 2019, arguing that it would complete its transformation from an exchange operator into a group that also controls lucrative data at the heart of financial markets.

Nearly two years later, the initial abduction of investors has given way to a more sober examination of the challenges that LSE CEO David Schwimmer must face in order to pay off the biggest deal in recent history. the company.

Eikon-friendly service isn’t the only headache. David Craig, the former head of Refinitiv whose importance highlighted the LSE in his outlook for the deal, resigned in July. Refinitiv is also embroiled in a dispute with news provider Reuters over an unusual three-decade contract costing $ 325m a year.

“The former LSE company could not grow in perpetuity, so it needed to make a deal,” said Rupak Ghose, advisor to fintech and market infrastructure companies who believes the combined group will do well to meet the needs. their revenue targets for the next five years.

Schwimmer, who sealed the resumption a year after he succeeded Xavier Rolet as chief executive, will have a chance Friday to allay concerns when the LSE organizes an event aimed at raising investor awareness on Refinitiv.

The former Goldman Sachs banker insists that the last four months – the LSE has only taken official control of Refinitiv earlier this year after a prolonged probe of the agreement by European competition regulators – offers little reason of concern, indicating a five-year integration plan.

“I see the last few months as the ones we’ve made great progress on,” Schwimmer said in an interview. “We have been refinancing our debt. We have made it clear to the market and to our shareholders that we are investing in the company to drive growth.”

It was a warning in early March, however, that the bill for the integration of Refinitiv would be stronger than expected which it first took some of the gloss from the agreement. The LSE stock has suffered its share I’ll drop it in a day in more than two decades.

According to leaders on both sides, there is a recognition that merging companies with different contrasting cultures will take time. LSE is a highly regulated and centralized company accustomed to managing critical market infrastructures, while Refinitiv is a technology and data sharing team with dozens of teams working on small projects.

David Schwimmer sealed the deal in a year after succeeding Xavier Rolet as LSE’s executive director. © Bloomberg

Given that Refinitiv commanded twice the revenue of the LSE and about four times its workforce, some employees of the group believed it would dominate the combined company.

Craig, a 51-year-old Briton, intended to speed up decision-making in Refinitiv and extend this approach to the LSE, according to two people who know his plans. For his part, Schwimmer focused on IT integration this year and presented cuts in overlapping senior leadership roles.

The relationship between the men remained cordial, people said, but Craig prepared for his departure by assuming his successor, former Bloomberg executive Andrea Stone.

It was Craig’s frustrations over a lack of investment by Thomson Reuters, owner of Refinitiv for the decade following the financial crisis, that led him to help drive the group’s $ 17.3 billion sale. to a private capital consortium led by Blackstone in 2018. In the 18 months the consortium had sold the business to the LSE, although it retained a 29% stake.

The graph of revenue columns (£ bn) showing data services is a high recurring income stream for the LSE

As the stock and bond markets have enjoyed a historic bull run, it is Bloomberg, instead of Refinitiv, that has been the winner. Bloomberg’s share of the market for providing data and analytics to the financial services industry stands at 33 percent by 2020 as Refinitiv drops to 19.4 percent, according to Burton-Taylor Consulting International.

There is no easy way to eliminate the tension between the need to invest in Refinitiv while meeting the aggressive financial objectives of the acquisition. These include reducing LSE’s net debt by more than 3.5 times its adjusted earnings to less than twice as early as 2023.

“From our perspective, what’s important is the commitment to reduce leverage,” said Donald Robertson, senior analyst at Moody’s, adding that the cost of integration was one of the biggest risks to the credit rating. of the LSE.

“It’s a long and complex five-year plan. They spend a lot of money on it, “said Robertson, who has an A3 investment rating on LSE.” There will be ups and downs along the way. “

The LSE, whose activities range from clearing house LCH to FTSE stock exchange index Russell, says it is on track to meet the cost-saving targets set for the deal.

An advertisement for Refinitiv in London’s Canary Wharf financial district. The investment is very necessary if Refinitiv is to compete with the heavyweights of the industry © REUTERS

Prior to the recovery, Refinitiv had completed a $ 650 million cost-cutting operation that would eliminate jobs in expensive cities like London and New York while relocating some product development to China. More functions have been outsourced to TCS, the Indian IT services group.

However, the Eikon terminal and its long-term replacement, Workspace, have seven investments.

It will be vital if Refinitiv has to compete against other heavyweights in the industry including Intercontinental Exchange and S&P Global-IHS Markit, according to Ghose. The LSE seeks to increase revenues between 5% and 7% for the next three years.

When the company of more than 300 years tries to snatch costs from the company, Refinitiv’s contract with Reuters emerges as a significant hurdle. It adds up to a financial liability of more than $ 9 billion, with annual payments from Refinitiv amounting to more than half of Reuters ’revenues.

Alessandra Galloni, recently appointed Reuters editor-in-chief, described the contract as “the envy of the media industry,” a historic alliance that provides a guaranteed revenue stream.

Yet unorthodox terms, struck when Thomson Reuters sold Refinitiv to the Blackstone-led consortium, put the collaboration between the data provider and the news service under considerable tension.

Chart of stock prices and index lowered to Aug 2019 showing LSE performance under Schwimmer

Even before the resumption of LSE, Refinitiv had raised concerns with Reuters over its press release, according to people familiar with the discussions. Reuters has won prestigious Pulitzer Prizes in recent years, but it was noticeably five hours slower than Bloomberg in reporting the Suez Canal blockade, a vital story for Refinitiv customers.

Refinitiv has struggled to secure what it wants from Reuters with a contract that includes only vague performance indicators, such as the error rate and the number of news snaps. Trying to take the most ambitious step to reduce payments would be even harder.

Differences have spread across released last month when Refinitiv she opposed Reuters ’plans to introduce a payment wall for its news site, arguing it would cause them“ irreparable damage ”. Refinitiv warned that the move risked cannibalizing its sales while also undermining the exclusive right it has to resell Reuters news outlets.

It forced Reuters into a humiliating withdrawal, with the launch of the delayed paywall until the differences were resolved. In a joint statement, Reuters and Refinitiv said “the foundation of our partnership is strong.”

“As with any business agreement, there are persistent and private discussions about our business approach and products.”

The paywall deal could ultimately lead to a greater reassessment of the partnership and its functioning, according to people familiar with the matter. “The contract is a grind [Refinitiv’s] neck, ”said one person with knowledge of the negotiations.

Few believe that Refinitiv is in immediate danger of becoming one for the LSE.

The group’s shares have risen more than 40 per cent since the deal was made in August 2019. British asset manager Lindsell Train, one of the LSE’s largest shareholders, remains a strong supporter of the deal. , saying after the March notice on costs that management “knew that Refinitiv was a company that needed work.”

This week Schwimmer will have to explain how much.

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