London Stock Exchange (LSE) announced this week that it was acquiring The Yield Book and Citi Fixed Income Indices from Citi, including the World Government Bond Index for $685 million in an all-cash deal. The deal is expected to close in the second half of 2017, with an undisclosed mix of financing from existing cash and credit facilities.
The combined target business generated revenue of $107 million and EBITDA of $46 million. This implies a multiple of EV/EBITDA of 14.9 times, which is taken from a pro forma estimate of the costs to be allocated under LSE’s ownership. Last year, the average multiple for data analytics firms specializing in financial services came in at about 16.1 times EV/EBITDA.
Also for reference, in late 2015, Intercontinental Exchange bought Interactive Data Holdings Corporation at 13.8 times EBITDA, at a deal some observers believe warranted stronger multiples. Given these metrics, we believe that LSE paid a fair price for the deal. Since we estimate that LSE trades at about 17.5 times adjusted EBITDA, the deal will immediately improve this ratio.
This is prior to accounting for any revenue and cost synergies, which management expects over the next three years to be $30 million and $18 million, respectively. We also estimate that the additional business will constitute approximately 5% of revenue and have a similar and possibly greater effect to the bottom line. Unlike many of their counterparts, LSE's management has a good history of remaining on track with anticipated synergies on both the revenue and cost side.
We like this acquisition and believe this transaction will also complement the company’s existing multi-asset, moaty index business. We are maintaining our £31 fair value estimate, as we believe London Stock Exchange paid a fair price for the Citi businesses.
Investment Thesis
The London Stock Exchange has transformed itself over the past five years, going from a small player primarily exposed to the less-ideal business of cash equities to a top player among the exchanges, with one of the more attractive business mixes in the space. LSE now generates the majority of its earnings from instrument-clearing through LCH and its index segment, FTSE Russell.
We believe that both segments, which make up over 60% of total revenue, are poised to grow in the mid- to high single digits per year through 2021. Because of the limited marginal costs associated with these businesses, a high degree of operating leverage is likely to expand operating margins to 38% as well. LSE also operates under an open access model.
This, combined with several new initiatives underway, gives LSE positive optionality, in our view. LSE does not trade at a cheap multiple, but this premium is likely deserved as it has a uniquely attractive mix of businesses in its space.
