FOR the financial correspondents at Reuters it was a frantic Friday. A week
that had already seen News Corporation make a $5 billion (£2.5 billion)
offer for Dow Jones, owner of The Wall Street Journal, was ending in a
flurry of big-name bids for EMI, Yahoo and Hanson.
But at 9.46 on Friday morning, the takeover boom in the City moved much closer
to home.
The board of Reuters announced to the stock market it had received “a
preliminary approach from a third party which may or may not lead to an
offer being made to Reuters”.
Shares in the financial-information group, already up strongly in heavy
trading, jumped to 649p. Only four years ago, in the run-up to the invasion
of Iraq, the price of shares in Reuters, then struggling with a postbubble
hangover, had fallen to less than 100p.
Tom Glocer, Reuters’ chief executive, has already pulled off a dramatic
turnround, reviving a company that many thought had lost out to Bloomberg,
its great American rival. The takeover approach underlines just how far the
company has travelled.
Although not named by Reuters, within hours the bidder was identified as
Thomson Corporation, the Canadian publishing group that used to own The
Sunday Times in the 1960s and 1970s.
Thomson, still chaired by a member of the founding family, has evolved into a
professional information provider, employing 32,000 people and generating
$6.6 billion in revenues last year. It is particularly strong in legal and
financial markets, where its brands include Thomson One, Datastream and
Tradeweb – the latter being widely used by fixed-income traders.
The move on Reuters caught many market professionals by surprise. The
independence of the 156-year-old agency is protected by its constitution,
which prevents any shareholder from owning more than 15% of the company.
In addition, there is a “founders share” mechanism, which gives the company’s
protectors wide-ranging rights to block any hostile proposal.
However, the neutral tones of Reuters’ statement to the market suggested that
the offer from Thomson was far from unwelcome.
One reason for this, sources suggest, is that Thomson is contemplating a
generous offer – significantly above the closing price on Friday evening of
6153/4p.
Others speculated that a sale now could make sense for Glocer. His latest
initiative to revive the group’s sales, known as Core Plus, is forecast to
generate a substantial improvement in earnings next year from electronic
trading, and from sales to enterprise customers and to India, Russia and
China.
“The big year for them is next year, when earnings [per share] should go from
20p to 30p,” said Lorna Tilbian, media analyst at Numis Securities. “But
it’s always much better to travel than to arrive.”
In other words, by selling now, Glocer and his shareholders could bank the
uplift in value from the expected improvements in Reuters’ business, without
having to deliver the better results.
Those familiar with Reuters also pointed to past comments made by Pehr
Gyllenhammar, the former Volvo boss who is chairman of the Reuters Founders
Share Company – the body that holds a veto right over any offer.
Gyllenhammar has previously said that he does not regard the founders share
arrangements as a “poison pill”, and that he could imagine a bid being
approved – provided the buyer could guarantee the continued editorial
independence of the Reuters news service.
Thomson, with a long and distinguished history as a media owner, looks well
placed to be able to offer the necessary assurances. The company declined to
comment.
It might also be possible to ring-fence the Reuters news service which,
although it employs 2,400 of the group’s 17,000 staff, provides less than
10% of the company’s revenues.
Gyllenhammar, who is also a former chairman of Aviva, the insurance company,
could not be reached for comment on Friday evening.
Thomson, which is listed in New York and Toronto, has a market value of about
£14 billion, but buying Reuters would still be a hefty acquisition, costing
£7 billion or more.
However, Thomson has already embarked on the sale of its education division,
which is expected to fetch a price in the region of £2.5 billion.
News of a potential takeover of Reuters followed hard on the heels of News
Corporation’s offer for Dow Jones, another of the most famous names in
financial markets. The American company, which also runs a news-wire
service, gives its name to the Dow Jones Industrial Average, the best-known
index of US stock-market performance.
Tilbian said that last week’s acquisition “feeding frenzy” was reminiscent of
the takeover booms that took place at the end of the 1980s and at the turn
of the millennium.
Despite the coincidence, sources suggested that Thomson’s interest in Reuters
preceded News Corporation’s offer for Dow Jones, which has been rejected by
the controlling Ban-croft family (see opposite page). The two sides
are understood to have started exploring a merger as long as two years ago.
Analysts said combining Reuters and Thomson made good financial and industrial
sense.
Claire Enders of Enders Analysis said: “The companies have a very similar
range of operations. There are significant cost efficiencies to exploit.”
Others pointed out that while Thomson generates most of its revenues from
North America, Reuters was stronger in Europe and Asia.
The two companies’ products also look complementary. To oversimplify, Thomson
sells cheaper information systems, while Reuters offers more expensive
products that are relied on by investment banks. And while Reuters has a
long-established strength in foreign-exchange markets, Tradeweb has given
Thomson the edge in fixed-income, a fast-growing area in recent years.
Some analysts suggested that Thomson might have to see off rival interest from
Pearson, the publishing group that owns the Financial Times.
However, Dame Marjorie Scardino, Pearson’s chief executive, is more focused on
educational publishing, which provides a much bigger share of the group’s
revenues and profits.
As if to emphasise the point, on Friday afternoon Pearson announced the $950m
purchase of Harcourt Education International and Harcourt Assessment from
Reed Elsevier.
The negotiations between Reuters and Thomson still have some way to go,
according to one insider. The proposed terms may not be announced for two
weeks.
Even then, the deal will face significant hurdles. Quite apart from the need
to satisfy the requirements imposed by the founders share and the Reuters
Trust, Thomson will need to persuade competition regulators that the deal
will not give it excessive market power.
Bloomberg, the company founded by New York mayor Michael Bloomberg, is likely
to have strong objections to a merger of two of its biggest competitors.
Investment banks and fund managers, along with other users of the two
companies’ financial-information services, may also be worried about the
prospect of being overcharged.
That’s not the only reason why the deal may come under regulatory scrutiny. On
Friday morning, before Reuters put out its announcement, 40m shares had
changed hands – almost three times the recent daily volume.
News of the deal had clearly leaked, allowing some speculators to make a
killing. Even though some of this trading was probably against the law, it
was another illustration of the value of Reuters’ primary commodity –
financial information.
