Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
A Chance to Rewrite the Financial League Tables by Bill Alpert
Summary: Thomson's (TOC) recent $18 billion (352.5 pence/0.16 share) offer for rival Reuters (RTRSY) valued Reuters at about 700 pence a share -- a generous 15x cash flow and 25x 2008e earnings. Reuters shares jumped on the news, but only to about 615 pence, reflecting investors uncertainty over the deal getting Reuters approval, and a 5% slide in Thomson shares post-offer. A Reuters insider says that despite Street reservations, its Trust is likely to support the merger, which would produce a worthy Bloomberg competitor -- 60% of the combined company's revenues would come from financial customers. The companies say they can save $500 million post-merger. And the combined company may be able to boost profit margins with enhanced pricing power. Thomson had 8% revenue growth in 2006, but earnings jumped 26% to $860 million, and free cash flow rose 21% to $1.4 billion. Its shares, up 40% since 2002, are way ahead of rival stocks like Dow Jones & Company Inc. (DJ). The company is now addressing apparent flaws in its financial database, and the merger could help it overcome bad press it received since Thomson Financial would be subsumed under the Reuters name. 2008 cash flow forecasts for the companies is $4 billion. Add $500 million in cost savings, multiply by 11.5, account for debt and the new shares issued, and Barron's calculates an enterprise value of $47.5 billion and share value well over $50 -- 20% higher than their current $42.
Related Links: Reuters trustees set to back Thomson bid - paper [Reuters], Deutsche Bank: Thomson-Reuters Combo Would Have Leakage, Be Anti-trust Risk • Thomson-Reuters Deal Could Result In Loonie Sell-off • Thomson and Reuters: Seeking The 'Smart Pipe' of Financial Content