Nick Train has backed the London Stock Exchange Group's (LSE) proposed $27bn purchase of Refinitiv, Thomson Reuters' financial and risk business, announced at the start of August.
LSE said on 1 August it had agreed terms to acquire Refinitiv from Thomson Reuters and private equity firm Blackstone; both will hold a 37% stake in the new group.
If approved, the deal will double LSE's enterprise value (EV) and create the largest listed financial markets infrastructure company in the world. LSE's share price jumped 24% to over 7,000p on the news.
Train, portfolio manager at Lindsell Train, told clients that, "at just over four times EV/sales, the price looks good compared to other quoted data assets".
Breaking down the deal further, Train noted Refinitiv owns a number of assets that will complement LSE's stable of businesses. "Less happily, Refinitiv brings with it a big chunk of debt, but this is the only obvious blemish on a pairing that seems remarkably concinnous," he added.
Nick Train: Woodford fallout has been damaging to us
Train said he is "cautious of being overly effusive", due largely to there being plenty of nuances still to understand, but admitted he's not surprised initial reaction to the deal has been positive.
First, he explained, "Refinitiv owns a number of important financial platforms". These include market-leading, electronic over-the-counter (OTC) trading venues FXall, which offers dealer-to-customer currencies trading; and Tradeweb, which offers trading in treasuries, rates and, other credit derivatives.
Train said: "Akin to LSE's existing marketplace businesses these benefit from high volumes and deep pools of liquidity. This leads to a virtuous cycle, whereby more flow begets more liquidity and utility, attracting more participants and even more flow.
"By increasing [its] exposure to currencies and fixed income - two of the world's biggest asset classes - LSE is also furthering long-held strategic ambitions, positioning it nicely for the ongoing electronification of OTC trading."
The hidden tech treasures among UK growth stocks
Network effects
Refinitiv's "halo of corresponding data" is also seen as a positive for Train, as "these self-reinforcing network effects have always been central to our thesis for LSE".
Refinitiv's highest-profile component, its Thomson Reuters Eikon desktop terminal distribution channel, also adds to the data story. He noted that Eikon is "just one aspect of Refinitiv's data distribution capabilities, which sit on an infrastructure platform that's taken many years and many billions of dollars to build".
"The platform integrates the datasets, overlays functionality and pipes the result directly into the workflow of Refinitiv's globally dispersed customer base. LSE's existing market and index data offerings, [including] FTSE-Russell, will join this aggregate flow, as might any newly acquired feeds.
"With the participation of new partners and LSE's open-access philosophy helping to strengthen the collaborative model with the sell-side, the platform should become ever more valuable. This combined data-plus-analytics-plus-distribution platform will be a key asset for LSE and a hard thing for a new competitor to replicate."
One concern Train said he has about wide-moat marketplace businesses is how they manage the transition from regional semi-monopolies to relevant global enterprises. However, he countered: "[Refinitiv's] North American and emerging market-derived revenues more than double those sourced from Europe - a contrast to the UK-centric LSE, where these weightings are reversed."
Train ended his monthly report praising LSE's 300-year-plus lifespan as "exceptional… in a cut-throat business environment where survivability is low".
He hailed the firm's dividend growth track record, which has grown at a spectacular 18% per annum since the turn of the century - "a hard enough rate to sustain for even a couple of years, let alone 18".
"This has translated into stock returns capable of outshining even the brightest tech stars. Since May 2012, when Facebook listed, LSE's total local currency return has annualised at just shy of 36% pa," he said.
"[Since then, LSE has delivered] a nine-fold gain that's outpaced Apple, Google, Facebook, Microsoft and now even Amazon. Not bad for a spritely 300-and-something year old, setting out on its own data-driven journey."
