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Sydnee Gatewood
Sydnee Gatewood
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David Rolfe Comments on S&P Global

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January 13, 2021 | About:
S&P Global (NYSE:SPGI) announced the acquisition of IHS Markit, a provider of financial indexes, fixed income data, and industrial market data. S&P Global offered about $40 billion in their equity to IHS at a modest premium to IHS' price at the time. S&P Global's management has done an excellent job managing costs and we expect this discipline should translate well to IHS' expense base. In addition, the high level of recurring revenue and competitively advantaged positioning of both businesses should auger well for continued top-line growth.

S&P Global

S&P Global announced the acquisition of IHS Markit, a provider of financial indexes, fixed income data, and industrial market data. The Company offered about $40 billion in SPGI equity to IHS Markit at a modest premium to IHS' price at the time. We think the acquisition has compelling industrial logic, despite both companies exhibiting little revenue overlap.

Like S&P Global's equity indices, Markit has amassed some very unique index assets that define its product category. For example, Markit's iTraxx and CDX indexes are the most popular baskets of credit default swaps (CDS) on loans and regularly traded debt, with market activity north of $5 trillion a year that make up more than 90% of CDS market activity, according to the International Swaps and Derivatives Association. Markit also provides intraday pricing data on millions of corporate and sovereign bonds as well as consensus data to help independently verify valuation data on a wide array of derivatives.

Tangentially, S&P Global is one of the largest providers of credit ratings services and therefore data for both loans and traded bonds, so there should be ample revenue and/or expense synergies when the combined company approaches mutual customers of their data. The Company's Market Intelligence data platform will be particularly important as a distribution hub for the new data sets being acquired from IHS Markit. For example, mutual customers that already use S&P Credit Research will be able to easily access fixed income issuance data from Markit.

The other 60% of IHS Markit's revenues come from proprietary and public datasets as well as analytics for various industrial markets, including vehicle ownership records and production forecasts, oil and gas data for upstream, midstream and downstream applications, and maritime vessel data. The Company's Platt's segment should benefit from the analytic capabilities that IHS brings to the combined company.

On the face of it, having the same customer does not necessarily generate new revenue, but there should be ample overlapping expenses that can be harvested or reinvested for future growth at the combined company. The Company's management has done an excellent job over the years leveraging its "asset-light" model (fixed plant investment is low as percentage of total assets). With a methodical focus on low-risk cost savings and reinvestment, we expect this discipline can be effectively overlayed onto IHS Markit, which has a similarly asset-light model (gross plant running about 10% of total assets). S&P Global and IHS Markit should be able to reduce 5%-10% of their expense base, though we would expect them to reinvest some of this.

The combined Company should be able to generate mid-to-high single-digit revenue growth over the next several years, as both businesses expand their offerings commensurate with the massive expansion of capital markets thanks, in part, to perpetually profligate monetary policy. We also expect the new Company to be able to generate steady expense leverage and drive very attractive marginal returns on invested capital while leading to healthy double-digit earnings growth, once the dust from the acquisition has settled.

Clearly IHS Markit management were motivated sellers, as S&P Global offered just a single-digit percentage premium to IHS' previous close. That's not to say this deal came cheap, but both Companies exhibit nearly the same multiples that are at the upper end of their historical ranges. We would have preferred the Company issue more debt to finance the deal, however it will have plenty of capacity to repurchase shares in the future. We continue to carry S&P Global at a half-weighting and will wait for the market to serve up its nearly annual offering of the stock at cheaper multiples.

From David Rolfe (Trades, Portfolio)'s Wedgewood Funds fourth-quarter 2020 shareholder letter.

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