Thomson Reuters (TRI) could fetch nearly $3 billion for its Intellectual Property & Science business from either a strategic or financial buyer, according to company followers, as the information giant explores options for the division in an effort to hone its focus on financial and legal services.
Thomson Reuters announced Wednesday that it is exploring strategic alternatives for its Intellectual Property & Science unit, which offers patent and trademark services, and has retained Guggenheim Securities and J.P. Morgan as its advisers for the review.
In 2014, the division had revenue of about $1 billion and an EBITDA margin of 32.4%, which would imply EBITDA of approximately $324 million. Intellectual Property & Science accounted for about 8% of Thomson Reuters' revenue and 10% of its EBITDA.
New York-based Thomson Reuters also said it plans to use any net proceeds from a potential transaction for general corporate purposes, including investing in its core businesses, repaying debt and accelerating share buybacks.
"By sharpening our strategic focus, we are increasingly prioritizing investments behind the many opportunities we see at the intersection of global commerce and regulation," Thomson Reuters' president and CEO James Smith said in a statement. "I believe that Intellectual Property & Science will continue to thrive in the future and we want to put it in the best position possible to realize its potential."
Claudio Aspesi, senior research analyst at Sanford C. Bernstein & Co., said it's "not an unexpected" move from Thomson Reuters and the review comes as part of the company's shift in focus to financial- and legal-related data services.
Thomson Reuters has four main segments: Financial & Risk, Legal, Tax & Accounting and IP & Science.
IP & Science offers patent and trademark services that manage IP assets, in addition to platforms for scientific research and reports for corporations, governments and academia. The unit competes with Wolters Kluwer NV and Reed Elsevier (RELX) (ADR), among others.
Aspesi added that the IP & Science division is one of the premier assets in the niche science-related research market, explaining that it could receive strategic and private equity interest.
Reed Elsevier is a possible buyer for the unit, Aspesi said, but the London-based company would be doing a strategic about-face, since it's been pursuing organic growth. Making a bid to buy someone could raise concerns from the academic community about Reed Elsevier's power in the industry, Aspesi said. (Reed Elsevier also owns research services company, LexisNexis Group.)
Meanwhile, Axel Springer SE and John Wiley & Sons (JW.A) are other "obvious" potential suitors that could look to supplement their current businesses with IP & Science, he added.
"Their cash flow over time is attractive, and there's a lot of growth in science," he explained.
He also said the unit could catch the eye of PE firms.
With $324 million in EBITDA, Aspesi said, IP & Science could bring in nearly $3 billion in a sale.
"If they got less than 8 times EBITDA, I would be disappointed," he asserted. "If they got more than 10 times, I would be delighted."
A multiple of 8 times EBITDA would mean a price tag of about $2.59 billion, while a multiple of 10 would equate to around $3.24 billion.
Edward Jones analyst Brittany Weissman agreed that the business could bring in around $3 billion and be interesting as a strategic and financial play.
The most likely outcome is a sale of the division that simply hasn't been a core business, she explained.
Thomson Reuters' Financial & Risk and Legal units are the two biggest divisions of the company, while Tax & Accounting has been the company's growth engine.
Together, the Financial & Risk and Legal divisions accounted for 79% of last year's revenue while Tax & Accounting contributed around 11%.
Weissman also didn't rule out the possibility of Thomson Reuters selling the unit in pieces rather than whole.
Drew McReynolds, managing director of global research at RBC Capital Markets, observed in a note Wednesday that the pretax valuation of the unit is around $3.2 billion when using the multiple of 10 times EBITDA.
"With the likelihood of the company increasing M&A activity beginning in 2017, we believe net proceeds from any sale will largely be reinvested in other growth opportunities," McReynolds added.
Sanford C. Bernstein's Aspesi further added that Thomson Reuters, which has been shuffling assets through M&A in recent years, is narrowing down its focus to a coherent set of businesses by shedding divisions that don't feed into its strategic point of view.
Thomson Reuters isn't the only player in the information services space to pursue divestitures, however.
McGraw Hill Financial (MHFI) revealed Oct. 30 that it will start a process to explore strategic options for its marketing services unit, which consists entirely of its J.D. Power & Associates business, as part of a transition to focus more on financial information. McGraw Hill has already sold off its construction data and education units in recent years.
Company followers said earlier this month that McGraw Hill's marketing services unit, which has revenue of $350 million, could bring in about $1 billion in a sale and attract interest from sponsors.
"All these companies were growing as a set of very disparate and often very incoherent portfolios with no synergies across businesses," Aspesi said. "It can make a lot of sense to focus down."
Shares of Thomson Reuters inched up around 2% to $40.78 midday Wednesday, giving the company a $31.3 billion market capitalization. Thomson Reuters is up about 1% year to date.
Officials with Thomson Reuters declined to comment while those with Reed Elsevier, Axel Springer, John Wiley & Sons didn't return requests for comment Wednesday.