In October 2016 Profit & Loss published an article: “Who Are the Potential Buyers of NEX?” This time around, Galen Stops applies the same type of analytical treatment to Refinitiv.
In October 2018 a consortium, led by the private equity firm Blackstone, concluded a deal to acquire 55% of the equity in Thomson Reuters Financial & Risk (F&R) business, now rebranded as Refinitiv. No one in the market is under the illusion that Blackstone intends to maintain its ownership of Refinitiv, least of all the staff that work there.
“Blackstone will have an investment horizon, as they do for every investment that they make, and ultimately their objective will be to build a stronger, more successful business and then return money to their investors.” says one source at Refinitiv. Pressed on potential buyers for the firm, they respond: “I think it’s too early to say, we’re at the very start of this journey. We were one of the biggest transactions ever [in FX] and we intend to grow and be a big successful company at the end of it and then we will find ourselves a new home.”
Even if staff at the firm refuse to be drawn into the speculation about the long-term home of the Refinitiv business, this hasn’t stopped market participants from making some educated guesses.
So here are some of the more plausible ones:
1. Deutsche Boerse Group
Why it makes sense: The Blackstone deal valued Refinitiv at $20 billion, and even if the business was broken into component parts any deal would require very deep pockets on behalf of the buyers. This immediately makes exchange groups the most likely, and indeed almost certainly the only realistic, candidates.
The fundamental reason why this deal would make sense is because ultimately Deutsche Boerse is looking to compete with CME Group in the FX market. Once the CME completes the integration of what was until recently NEX Group, the combined company is going to be the 800 pound gorilla in room (“the room” in this instance being the FX market). This could prove problematic for Deutsche Boerse given that both exchange groups appear to be following a similar business plan of building a “one-stop-shop” for FX trading, and CME will essentially be able to provide broadly the same FX services and products as Deutsche Boerse, except with more liquidity across its trading platforms.
Buying Refinitiv, or at least part of the company, would tip the scales back in Deutsche Boerse’s favour. The exchange group sanctioned the purchase of GTX last year to help boost its spot business, but buying Matching would not only fill the gap that still exists in this part of the firm’s FX franchise, but slingshot it past CME Group in terms of spot volumes. Or indeed, buying FXall could be seen as complementary to its existing business, further expanding the amount of business that it sees from certain buy side client segments.
Why it won’t happen: Deutsche Boerse already shelled out $796 million to buy 360T and then on top of that another $100 million to acquire GTX last year. This was a sizable investment for a firm that had no significant FX franchise to speak of prior to these acquisitions, but purchasing any part of the Refinitiv business that is likely to move the needle for it is going to require the exchange to pony up at least double this figure again. Have the returns that it’s seen from its original investment in FX been good enough to warrant doubling, tripling, maybe even quadrupling down in this space? Having spent the past three and a half years integrating 360T, is Deutsche Boerse ready for an even bigger such project? Moreover, is the appetite there for such a large investment?
2. Intercontinental Exchange (ICE)
Why it makes sense: If the rumours are to be believed, ICE has been flirting with buying an OTC FX platform for years. Every time a platform comes up for sale, ICE is mentioned as a potential buyer, and in particular sources were at one point suggesting that there were serious discussions within the exchange about acquiring FastMatch before it ultimately went to Euronext. It has a clearing house and, although it’s relatively modest in size, it does already have an FX futures business and therefore would be able to potentially marry these with the OTC FX platforms under the Refinitiv banner.
In addition, ICE CEO, Jeff Sprecher, isn’t afraid of getting out the cheque book in order to make a big acquisition. In 2017 and 2018 ICE spent a total of $1.85 billion buying BondPoint and then TMC Bonds, while in 2015 it paid $5.2 billion to purchase Interactive Data and then a further $650 million on Trayport. In between this, ICE tried to disrupt a proposed merger between Deutsche Boerse and the London Stock Exchange Group (LSEG) with a $15 billion allcash offer for LSEG in 2016, although ICE walked away from the deal months after announcing its bid. Then back in 2013 it closed a deal for NYSE Euronext for $11 billion (although the deal was originally valued at $8.4 billion when it was announced in 2012, this valuation rose by the time it closed), before subsequently spinning off the Euronext part of that business.
This history suggests that ICE might be the most willing of the large exchange groups to splash the cash on an asset that it finds attractive and buying Refinitiv, or at least certain parts of it, would in one fell swoop make it one of the biggest players in the FX market. Another point worth considering is that Refintiv is very much trying to brand itself as a data-focused technology company (an advert currently posted in the Wall St. subway station reads “Refinitiv: Data is Just the Beginning”), something that could make it more attractive to the exchange group, given that it already operates its ICE Data Services business.
Why it won’t happen: ICE are perennial window shoppers in the OTC FX platform space. As previously mentioned, they’re always mentioned as a possibility when platforms are up for sale but never seem to be the mentioned as a serious contender when the largest of these assets have been available. Moreover, although the exchange does have an FX futures franchise, there has not been any real evidence in recent years that there is a significant amount of drive or internal political will within the firm to substantially grow and develop this franchise. On this front it is significant that the most recent major purchases by the ICE have been in the bond space, as this probably indicates that the firm is much more focused on building out its fixed income business right now.
Why it makes sense: For a number of years Nasdaq did a strange hokey cokey where it was out and then in and then out again of the FX market. In 2014 it announced plans to grow its footprint in the FX market and by 2015 it was being touted as a potential buyer for one of the many OTC FX platforms that seemed to be available for purchase at the time. By the end of the year, however, Nasdaq revealed plans to instead launch its own FX platform the following year, plans that were promptly shelved when it announced that it was putting its FX clearing and trading plans on hold at the start of 2016. And of course, by the end of 2016 when it was announced that Icap would transition into NEX Group, Nasdaq was once again being touted as a potential buyer of the firm.
It seems that Nasdaq does have an interest in further diversifying away from its equities business, and Refinitiv is probably the only firm with an OTC business currently on the market that would actually move the needle enough within FX for a large exchange group to bother buying.
Why it won’t happen: Because it’s Nasdaq and it’s FX (see above). The exchange group’s FX strategy in 2014-2015 period was predicated on the assumption that at least some parts of this market would become subject to mandatory central clearing, an assumption that proved to be wrong. This time round it’s hard to see what the impetus would be for the exchange operator investing so much money in FX, except that there’s an asset available within the Refinitiv business that it could probably afford.
4. London Stock Exchange Group (LSEG)
Why it makes sense: LSEG owns LCH, which has taken the early lead in the central clearing of FX products, and the fact that FX has resisted moving towards the traditional exchange model for so long already suggests that the fact that it doesn’t have an FX futures business won’t necessarily be a problem. Piecing together the Refinitiv business lines with a clearing house could produce some of the much touted efficiencies of the exchange model, while keeping the market OTC. Indeed, this is why some market participants were suggesting that LSEG was in the frame to buy NEX back when that was up for sale.
Why it won’t happen: Since the rumours about NEX there has simply been no suggestion that LSEG is seriously in the market for an OTC FX platform to help diversify its revenue streams.