Summary
- The London Stock Exchange Group recently announced a landmark ten-year strategic partnership with Microsoft.
- While the deal will add some costs, the long-term revenue upside more than outweighs any near-term headwinds.
- The stock still trades at a discount to its peers in the financial data provider space and should re-rate over time.
Things are looking good for the London Stock Exchange Group ( OTCPK:LNSTY ) ahead of the upcoming Q4 report. The company has joined forces with Microsoft ( MSFT ) on a ten-year strategic partnership to boost its data and analytics capabilities and integrate MSFT’s cloud infrastructure solutions (Azure Purview and Synapse); in turn, MSFT gains a 4% equity stake and a Board seat.
While the post-deal revenue target remains undisclosed, the addition of a strategic partner like MSFT and the enhanced pipeline optionality support the case for a higher earnings growth trajectory. Yet, the stock continues to trade at a valuation discount to other major financial data providers at ~27x fwd earnings , presenting ample room for a re-rating over time. Key near-term catalysts include the upcoming Q4 update, as well as the next tranche of the buyback program.
Kicking Off a Long-Term Microsoft Partnership
The London Stock Exchange Group and MSFT recently disclosed the formation of a ten-year strategic partnership, which will see the company access the MSFT cloud infrastructure solution suite and enhance its data and analytics capabilities. MSFT will also be taking a 4% equity stake and a Board seat, with the stake coming out of the Blackstone ( BX )/Thomson Reuters ( TRI ) consortium, which had received the stock as part of the prior Refinitiv transaction .
Through closer integration with MSFT, the hope is for the London Stock Exchange Group to benefit across the tech stack, including its data infrastructure and analytics capabilities. Over the long run, the collaboration should also drive an improved product offering and allows the company access to an expanded addressable market. Management guided to the deal increasing growth “meaningfully,” though given the lack of revenue synergy disclosures, it’s hard to gauge the accretion potential here.
What management did disclose, though, was the incremental costs from the deal. Over the FY23-FY25 period, the incremental cash cost has been pegged within the GBP250m-300m range, of which GBP100m will be allocated to capex and GBP150-200m opex. This implies any near-term impact will be relatively minor at 50-100bps to the EBITDA margin – all else equal, this would imply a 49.0-49.5% margin range vs. the prior ~50% FY23 target. And over a ten-year period, the ~GBP2.3bn of spending to migrate its data platform and infrastructure to the MSFT cloud is well within the cloud and legacy replacement opex projections, so any long-term margin impact should be net neutral.
Rejuvenating the Roadmap
The announcement of the MSFT partnership, while not immediately material to the P&L, should help to reshape the narrative around the stock for 2023. In particular, the lagging trading & banking segment should benefit from improvements to the new Workspace product. Additionally, the post-deal consolidation onto an integrated and flexible infrastructure should help as well (note the company will be using Azure Purview and Synapse for its cloud-based data architecture).
London Stock Exchange Group
The big optionality lies in new product developments with MSFT on board – while revenue benefits were not quantified, management did cite “meaningful” growth opportunities. It remains early days, but the joint London Stock Exchange/MSFT co-investment in the development roadmap for the data platform, Workspace product, and analytics initiatives should yield compelling launches over time. With MSFT also backing enhanced new analytics and modeling capabilities, I would expect improvements to the existing product as well. Results will take time, but at the very least, the deal is a statement of intent by the company as it looks to gain further share vs. key competitors Bloomberg and FactSet ( FDS ).
Mitigating the Post-Refinitiv Selldown Overhang
The technical implication of the MSFT deal is positive as well – by purchasing a 4% equity stake in the company from the BX consortium, the latter will see its stake reduced. This means a lower potential selldown post-lockup expiry, with the threshold in FY24 lowered to 9% (from 11%) and the 11% due post-FY22 results remaining unchanged. With a lower overhang following the MSFT entry, expect investors to refocus on the ongoing buyback.
The initial GBP250m tranche has been completed, with the second tranche kicking off in December and the final tranche due after that (most likely in Q2/Q3 2023). In total, this implies GBP750m of share price support; with BX and the related parties also participating, the buyback should go a long way toward mitigating the downside.
Microsoft Deal Adds Impetus to the Improving Fundamental Narrative
With the latest MSFT deal, the London Stock Exchange Group continues to make positive strides in overhauling the fundamental narrative. The deal likely won’t be near-term accretive, given the front-loaded expenses and the (unquantified) back-end-loaded revenue synergies. But the more important takeaway, in my view, is the optionality from the backing of a major strategic partner like MSFT via new addressable markets and the likely improvements to the new product pipeline over the long run.
With the narrative beginning to shift following a series of solid quarterly results as well, the persistent valuation discount to financial data providers like MSCI ( MSCI ) and Thomson Reuters seems unjustified. Assuming the solid execution continues in the coming quarters, expect the stock to re-rate accordingly.
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London Stock Exchange: Microsoft Deal Adds Impetus To The Improving Fundamental Narrative