CA - Thomson Reuters: Consider Recent M&A And Future Capital Deployment

2023-07-24 14:32:20 ET

Summary

• Thomson Reuters announced last month that it proposed to purchase legal business Casetext, which is part of the company's plans to exploit growth opportunities relating to AI.
• TRI has the financial capacity to deploy capital for both AI-related investments and dividend hikes in the future.
• I still have a bullish view of Thomson Reuters stock, taking into account the positives relating to the recent Casetext acquisition and its balanced capital allocation strategy.

Elevator Pitch

I continue to assign a Buy investment rating to Thomson Reuters Corporation ( TRI ) ( TRI:CA ) shares. I previously assessed Thomson Reuters' Q4 2022 financial results and the company's shareholder capital return target in my prior write-up published on February 13, 2023.

In this latest update, my focus is on Thomson Reuters' recent M&A activities and its capital allocation priorities. TRI has around $10 billion of acquisition firepower in the next two and half years, which allows the company to engage in value-accretive M&A deals associated with AI. More significantly, TRI strikes a good balance between capital investment and capital return. While TRI is keen on both organic and inorganic AI-related investments, it is still sticking to its annual +10% dividend growth guidance. As such, I still rate Thomson Reuters as a Buy, after reviewing TRI's recent M&A transaction and the company's capital allocation strategy.

Proposed M&A Deal Will Allow TRI To Capitalize On Growth Opportunities In AI

Seeking Alpha News reported earlier on June 27, 2023 that TRI plans to "acquire legal AI startup Casetext for $650M."

An Overview Of Casetext And The Proposed M&A Transaction

At the company's investor call on June 27, 2023, Thomson Reuters guided that the Casetext M&A deal "will be an accelerant to our organic growth as we go into '24 and beyond." TRI achieved an organic revenue growth rate of +6% in the first quarter of fiscal 2023, and the company is targeting to deliver an organic top line expansion rate in the 5.5%-6.0% range for full-year FY 2023. It is likely that this recent acquisition will put Thomson Reuters in a better position to register a faster pace of organic growth in the high single-digit percentage range in the years ahead.

A Brief Description Of Casetext's New AI Product, CoCounsel

In the chart presented above, it is highlighted that Casetext's key AI offering, CoCounsel, offers eight specific skills to help legal professionals. Thomson Reuters shared at its June 27 investor call that six of these eight skills "appeal broadly to attorneys involved in litigation and transactional areas of the law" which TRI's Legal Professionals business didn't have expertise in. In other words, TRI is well-positioned to cross-sell more services to its existing legal clients and attract new customers with a larger product portfolio following the acquisition of Casetext.

Apart from providing a boost to the growth prospects of Thomson Reuters' Legal Professionals business, the addition of Casetext will also allow TRI's Corporates and Tax & Accounting Professionals businesses to leverage on AI-related growth opportunities. In its June 27, 2023 M&A presentation, Thomson Reuters emphasized that the purchase of Casetext will "accelerate build of AI assistant capabilities for Tax & Accounting, Risk Fraud & Compliance markets." This ensures that Thomson Reuters won't lose market share to rivals, as an increasing number of businesses start to explore the utilization of AI.

More importantly, this Casetext deal is the latest AI-related M&A transaction for TRI. Thomson Reuters had earlier announced the buyout of SurePrep in November last year, which it referred to as a company that "leverages artificial intelligence to automate the collection of digital documents."

Thomson Reuters Has Significant Capital Available For Capital Deployment

The recent M&A deal involving Casetext, as detailed in the preceding section, is just one component of TRI's plans to capitalize on the rise of AI. Thomson Reuters also mentioned in its June 27, 2023 investor briefing that it has set a goal of allocating $100 million each year to organic investments associated with AI.

With regards to potential acquisitions in the future, Thomson Reuters revealed at Barclays' ( BCS ) Americas Select Franchise Conference on May 9, 2023 that it has an estimated "$10 billion in dry powder" for the 2023-2025 time period. In terms of distributing excess capital to shareholders, TRI is targeting a +10% dividend hike every year. It is noteworthy that Thomson Reuters has an impressive dividend distribution track record, having increased its dividend payouts for 30 straight years running .

Thomson Reuters' future investments (organic and inorganic) and dividends are expected to be funded by the company's internal free cash flow and asset monetization.

As per S&P Capital IQ's consensus data, TRI is projected to generate free cash flow of approximately $1.8 billion, $2.0 billion, and $2.1 billion for FY 2023, FY 2024, and FY 2025, respectively.

Separately, Thomson Reuters is allowed to dispose of 22 million shares and 8 million shares of London Stock Exchange Group ( LDNXF ) ( LNSTY ) in 2024 and 2025, respectively, based on the lock-up agreements it signed earlier. TRI had previously disclosed that it expects to receive $1.5 billion in divestment proceeds from the partial monetization of London Stock Exchange Group shares earlier this year.

Concluding Thoughts

Thomson Reuters' recent announcement regarding the acquisition of Casetext suggests that the company is serious about investing in AI. Besides M&A, TRI is also aiming for $100 million of AI-related organic investments every year. Thomson Reuters' strong free cash flow generation and the company's asset monetization opportunities relating to London Stock Exchange Group shares imply that TRI has no issues funding its future growth plans. In addition, TRI is still sticking to its target of raising its annual dividend payout by +10% going forward. Considering the above-mentioned factors, I see no reason to change my existing Buy rating for Thomson Reuters.

For further details see: