Thomson Reuters (TRI) Ratings Affirmed by Fitch Amid Move to Sell IPS Business

The ratings for Thomson Reuters Corporation (NYSE: TRI) including the company's 'BBB+' Long-Term Issuer Default Rating (IDR) and 'F2' Short-Term IDR, are unaffected by the announced agreement to sell its Intellectual Property & Science (IPS) business to private equity funds affiliated with Onex Corporation (Onex) and Baring Private Equity Asia (Baring Asia) for $3.55 billion in cash, according to Fitch Ratings. The Rating Outlook is Stable.

TRI first announced its intention to sell IPS in November 2015. The company has been focusing on simplifying its business over the past several years and operating at the intersection of global commerce and regulation. Fitch views the sale of IPS as consistent with that strategy. After IPS, Fitch believes TRI will have completed its large scale portfolio pruning activity.

TRI stated that it would use $1 billion of net sale proceeds to support its plans (announced in February 2016) to repurchase up to $1.5 billion of shares, leaving about $2.55 billion before fees and expenses for debt repayment and reinvestment in the business. Depending on how much of the remaining $2.55 billion is used for debt repayment, Fitch estimates pro forma gross leverage (total debt to operating EBITDA) as of March 31, 2016 could range from 2.1x to 2.9x. Fitch expects TRI to allocate the majority of the $2.55 billion to debt repayment, resulting in pro forma leverage below the company's 2.5x net leverage target (and also Fitch's downgrade trigger of 2.5x gross leverage).

Fitch estimates that IPS comprised about 8.2% of TRI's FY 2015 total revenues and 9.2% of EBITDA. Fitch expects the sale to be slightly dilutive to TRI's margins in the short-term, but inconsequential over the medium to long term.

Fitch estimates a purchase multiple of about 11.3x EBITDA based on a transaction value of $3.55 billion and IPS fiscal year (FY) 2015 EBITDA of $313 million. The sale is subject to regulatory approval and customary closing conditions, and is expected to close in the next few months. The sale is not subject to any financing condition. Onex and Baring Asia have obtained debt and equity commitments for the transaction.

IPS provides comprehensive intellectual property and scientific information, decision support tools and services that enable the lifecycle of innovation for governments, academia, publishers and corporations to discover, protect and commercialize new ideas and brands. Its portfolio includes Web of Science, Thomson CompuMark, Thomson Innovation, MarkMonitor, Thomson Reuters Cortellis and Thomson IP Manager.

KEY RATING DRIVERS

Conservative Financial Policy: The ratings reflect TRI's cash flow generating ability, geographic and product diversification, sound balance sheet, and consistent and conservative financial policies. Fitch expects the company will continue to target 2.5x net leverage.

Barriers to Entry: Fitch recognizes that there are meaningful barriers to entry in TRI's core businesses and that there are a limited number of well-capitalized competitors that compete predominantly on product differentiation, quality and delivery.

Subscription Business: TRI's revenue is predominantly subscription-based (87% of total in 2015), providing stability and visibility into the company's performance.

Capital Deployment: TRI has emphasized organic growth over acquisitions since 2013. Fitch expects TRI to focus less on smaller deals that increase operational and technological complexity, and instead consider medium-sized (i.e. greater than $500 million) transactions with compelling strategic rationale. In February 2016, TRI announced plans to repurchase up to an additional $1.5 billion of its common shares.

Cyclicality at F&R Segment: For the three months ended March 31, 2016, the segment's revenue was down 3%, but down only 1% on a constant currency and organic basis. TRI's overall revenue/product diversification creates a cushion to absorb specific segment pressures, and consolidated revenues were down only 1% through March 31, 2016 but up 1% on a constant currency and organic basis. For FY 2015, F&R segment revenue was flat on a constant currency and organic basis, while consolidated revenues grew 2%.

Operating Leverage, Margins: The ratings reflect TRI's predominantly fixed-cost business and high operating leverage. During the recent downturn, the F&R segment exhibited less operating leverage (on an EBITDA basis) than Fitch would have anticipated. Cost reductions in connection with the integration of Reuters provided a significant offset to declines in revenues. In the near term, TRI has opportunities to reduce costs, particularly with elimination of legacy products, and drive EBITDA margins into the high 20's.

KEY ASSUMPTIONS
--Low single-digit organic revenue growth;
--Continued margin improvements resulting from restructuring efforts;
--Completion of $1.5 billion share buyback program and return to historical levels thereafter; $1 billion in dividends annually with flexibility to moderate buybacks or acquisition spend

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--An explicit commitment to and sustained track record of more conservative balance sheet metrics could merit upgrade consideration. Fitch would need to observe a stronger operating profile within TRI's F&R segment as evidenced by sustained positive net sales and segment operating margins approaching 30%.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Fitch believes TRI is committed to its balance-sheet parameters. However, a significant acquisition or heavy repurchases that could lead to TRI operating materially outside its 2.5x leverage for several sequential periods, without a publicly stated plan to deleverage, could result in a negative rating action.

LIQUIDITY

As of March 31 2016, TRI had $869 million in cash and cash equivalents. Liquidity is also supported by TRI's $2 billion commercial paper (CP) program, which is backed by an undrawn $2.5 billion revolving credit facility that expires May 2018, and Fitch's expectations for mid-cycle annual FCF (after dividends) over $500 million.

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