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US data provider M&A poised to continue post S&P, IHS Markit merger

M&A activity among US data analytics and processing providers is poised to increase in 2021, given growing demand for data and analytics, a focus on scale, diversification and recurring revenue, and increased leverage headroom in ratings as growth returns, says Fitch Ratings. Prudent funding of transactions, greater growth potential and enhanced ability to capitalize on the trend toward increased digitalization and growth in nontraditional data will be key to realizing the benefits of consolidation and preserving credit profiles, particularly as valuations rise.

S&P Global’s proposed $44 billion merger with IHS Markit, inclusive of $4.8 billion of net debt, values IHS Markit at 24.1x Fitch-calculated LTM EBITDA, excluding estimated cost and revenue synergies of $480 million and $350 million, respectively. The EV/EBITDA multiple is nearly double what the London Stock Exchange Group (LSE) will pay for its planned acquisition of Refinitiv. The rise in valuations is further illustrated by the 13.4x Fitch-calculated EV/EBITDA multiple, excluding synergies, paid by a private equity consortium to acquire Dun & Bradstreet in 2018.

IHS Markit’s high valuation likely reflects the data analytics and processing provider (DAP) firm’s unique proprietary data sets, ability to generate mid-single-digit growth and high recurring revenue. However, disparate end markets, execution risk associated with the companies’ data and technology initiatives, and IHS Markit’s previous challenges achieving IHS and merger-related top-line synergies make Fitch cautious about the ability to realize $350 million of revenue synergies.

The proposed transaction will be all stock, even though recurring subscription-based revenue and high margins could support the use of leverage. S&P Global intends to maintain 2.00x-2.50x leverage, an increase of 0.25x from its previous target, which is equivalent to 1.30x to 1.90x Fitch-calculated leverage. Fitch affirmed S&P Global’s ‘A-’ long-term Issuer Default Rating (IDR) and placed IHS Markit’s ‘BBB’ long-term IDR on Positive Watch following the merger announcement, which is expected to close in 2H21.

In addition to a relatively conservative leverage profile, S&P Global will benefit from a higher mix of recurring revenue, increased scale, greater diversification and enhanced capability around high-growth adjacencies, like ESG and climate and energy transition. S&P Global estimates these sectors represent an approximately $20 billion total addressable market, with an average growth rate of 10%.

ESG data growth across the industry will likely accelerate in 2021, given product development among DAP providers and increased investor demand. IHS Markit has indices based on MSCI ESG data while Refinitiv, Bloomberg and FactSet Research Systems license and distribute ESG data and analytics. S&P Global’s direct ESG revenue is currently small but is expected to grow in the low to mid-double digits, even without its purchase of IHS Markit.

The companies’ technology strategies should improve the combined entity’s ability to benefit from the secular trend of digital transformation, which has been amplified by the coronavirus pandemic, even though horizontal application of the companies’ data science methods may provide limited revenue benefits over the near term. S&P Global is in the midst of a multiyear cloud transition, and IHS Markit is developing a single platform “data lake” for the company’s data sets. Both efforts should spur faster product development and result in more valuable analytics and enhanced client distribution, potentially accelerating growth for the combined company. Fitch Ratings

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