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S&P-IHS: asset sales ahead

S&P Global and IHSMarkit have announced their intention to merge in an all-share deal. The deal values IHSMarkit at a total of $44bn, including almost $5bn of debt, giving S&P shareholders two-thirds of the equity and IHSMarkit one-third.

The combined company will have financial data, benchmarking, and Environmental, Social and Corporate Governance (ESG) at its core. It will have revenues of $11.6bn, enabling it to compete with Bloomberg and Refinitiv. But it will still only have an 8% share of the estimated $32bn market compared with Bloomberg (21%) and Refinitiv (33%). (Source: Burton Taylor Consulting).

The companies expect to achieve growth of around 7% annually with an additional 2% from almost $500m in synergies. The deal would be earnings positive within two years.

S&P Global has its heartland in Standard & Poor credit ratings (50% of its business), stock market indices, and Platts energy pricing and analytics. The US-based company developed through acquisition by former parent McGraw Hill and was divested in 2011. It acquired SNL financial data in 2015 and AI analytics company Kensho in 2018. IHSMarkit is focused mainly on debt, derivatives and corporate research. The company was formed in the UK in 2001 as IHS, and merged with Markit in 2016. 

Regulatory scrutiny of the deal is likely to be intense. The companies have a particular concentration in commodity and energy data (Platts) and fixed income pricing data (IHSMarkit). The takeover of Refinitiv by the London Stock Exchange is currently nearing the end of its long approval process within Europe. The S&P Global and IHSMarkit deal will be the largest all-share transaction of 2020. 

There are some interesting historical twists in the story of these two companies.

Back in 2000, under McGraw-Hill ownership, S&P owned a division called S&P DRI (economic databanks , economic forecasting and Automotive industry forecasting & consulting) based primarily in the US and UK. It always seemed an uneasy fit with the rest of the S&P credit rating division and Platts.

In 2001, S&P divested DRI to a private investor Joseph Kasputys who merged it with eight other smaller companies to create Global Insight. In 2008, IHS Inc., based in Colorado, acquired Global Insight (and has since acquired another 70 companies before the 2016 merger with Markit.

The irony is that – 19 yrs later – S&P is effectively taking on its former DRI automotive division which is now a large slice of the Transportation and Engineering division whose revenue is second only to Energy in IHSMarkit.

Insiders say there are many tension points in this merger, given that legal action has been threatened in the past by S&P Platts against IHSMarkit for alleged misuse of proprietary data. This historic scar tissue may feed into what are expected to be some substantial post-merger divestments. Some possible targets will be the Market Intelligence division of S&P which accounts for 29% of revenue but only 19% of operating profit. Its 32% margin is almost half of the average of the other S&P divisions.

IHSMarkit’s whole Transportation & Engineering division, accounting for 27% of revenue, is vulnerable. But some parts are more likely to be sold than others. One third of the division’s revenue is from maritime and trade which includes the US Journal of Commerce and some shipping magazines, information and events. It would be good fit for the Lloyd’s List and Seatrade information and events of Informa Plc.

The possibility of merging the Informa and IHSMarkit maritime interests may have been discussed 18 months ago when the two companies, respectively, exchanged their Agribusiness and TMT groups in a no-cash deal. Perhaps the shipping combination is now possible. Or the ambitious newbie Freightwaves might just get there first.

S&P Global