Earlier this week, McGraw Hill Financial (“MHFI”) announced its intention to acquire Charlottesville, Virginia-based SNL Financial (“SNL”) for $2.225 billion. The sellers included New Mountain Capital, which acquired 60% of SNL Financial in July 2011, Reid Nagle (founder) and other members of SNL management.
We see this as a very strategic transaction for MHFI. SNL Financial has a number of very deep industry specific data sets with accompanying analytics that are unique in the market data sector.
SNL began by providing in-depth data related to the U.S. savings and loan industry (hence the name ‘SNL’). The company’s products enabled specific analysis to the level of individual metropolitan statistical areas (MSA or geographical areas in and around cities) and even to the individual branch level. Quickly, the company became a core tool of investment bankers and corporate development officers that analyzed the effect of mergers and acquisitions amongst depository institutions on the deposit market share in overlapping MSAs. The Herfindahl-Hirschman, or HHI, Index was used by bank regulators to gauge the level of competition, or not, within a given market, and regulators would require an acquirer to sell branches (and its corresponding deposits) if their deposit market share after a transaction was too high. SNL enabled these pro forma deposit market share calculations.
Over time, SNL has broadened its offering to include a number of vertically specific and deep data sets. The company now has offerings in the insurance, energy, metals and mining, real estate and media and communications sectors. Similarly to the strategy employed in banking, their strategy has been to go deep with vertically specific information and analytics as opposed to broad across industries and companies. As a result, SNL has built a highly unique and proprietary set of data and analytics as well as a very attractive company. There was considerable interest in acquiring the company.
Clearly, MHFI paid a full price for SNL: 8.7x 2015E revenue of $255 million and close to 44x 2015E EBITDA. By way of comparison, MHFI trades at approximately 5.1x forward revenue and 12.3x forward EBITDA. Factset (perhaps the most relevant publicly traded comparable company with 95% recurring revenue and comparable growth to SNL) trades at 6.4x forward revenue and 17.3x forward EBITDA.
Nevertheless, there were strong reasons for the transaction. SNL adds a unique and vertically specific set of data and analytics to S&P Capital IQ and Platts, and SNL’s size alone ($255 million in revenue) made it unique and attractive in this sector. Furthermore, it is a predominantly recurring revenue business (96%) with up-front, annual subscription payments, and SNL has grown at a faster rate than MHFI historically. SNL had revenue of approximately $145 million in 2011 when New Mountain invested in the company, and the company projects $255 million in revenue in 2015, representing a 15% compound annual growth rate over that time period. SNL’s new businesses are growing even faster, albeit from a smaller base. The addition of SNL will increase MHFI’s recurring revenue mix and should be incremental to growth.
MHFI and SNL believe that there are $70 million in synergies that should be achievable as a result of the transaction. Approximately half of these are believed to be cost savings. We believe there should be significant overlap and cost saving opportunities between the two organizations, particularly as it relates to data collection and aggregation.
In addition, 91% of SNL’s 2014 revenues were sourced from inside the United States. Meanwhile, MHFI is a global institution with operations across 30 countries and approximately $2 billion in revenues generated outside of North America. We believe there should be meaningful opportunity to utilize MHFI’s institutional and global salesforce to accelerate revenues from SNL products outside of the United States.
MHFI will borrow an additional $1.7 billion to fund the cash acquisition. Fitch has affirmed MHFI’s BBB+ issuer default rating with a stable outlook given the relatively modest pro forma leverage – 1.6x EBITDA. Even with today’s low cost of funds and an all cash offer, the transaction will be dilutive to EPS through 2017.
Helping to offset the purchase price somewhat, the transaction was structured as an asset purchase for income tax purposes, enabling MHFI to step-up the tax basis and realize tax benefits with a net present value that they calculate equals $550 million. SNL is an LLC and therefore a disregarded entity for income tax purposes, thereby avoiding the double taxation issue that can result for some sellers with this structure.
We hope you enjoy our analysis on the transaction – you can find the analysis on our website (click here), and please do not hesitate to contact us with any comments, questions on this transaction or any other relevant topics.
I look forward to hearing from you and hope that we can in some way be helpful in the future.