Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse 18 Conference Call. At this time, all participants have been placed on a listen only mode. The floor will be open for questions following the presentation. Let me now hand the floor over to Mr. Jan Strecker.
Good afternoon, ladies and gentlemen, and thank you for joining us today. Before I introduce today's speaker, let me remind you that this presentation includes certain forward looking statements. By their nature, forward looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward looking statements are not guarantees of future performance and actual results of operations, financial conditions and liquidity and the development of the industries in which Deutsche Borse and Axuma operate may differ materially from both made and or suggested by the forward looking statements contained in this presentation. Any forward looking statements speak only as of the date of this presentation.
Except as required by applicable law, none of Deutsche Borse and Axioma undertake any obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise. With me today are Theodore Weimar, Chief Executive Officer
of Doctor. Berger Peter Portmeyer,
Chief Financial Officer and Stefan Leitner, Executive Board Member responsible for post trading, data and index. Pedro, Stefan and Gregor will take you for the presentation. After the presentation, we will be happy to take your questions. The presentation materials in this call have been sent out via e mail earlier today and can also be downloaded from the Investor Relations section of our website. Be useful, this conference call will be recorded and is available for replay.
Let me now hand over to you, Thierry.
Thank you, Jan. Welcome, ladies and gentlemen. Thanks for joining us today for the presentation of yesterday's deal announcement. Let me provide you with an overview of the transaction and a strategic rationale behind the deal. Later on, Stefan Leitner, our management board member responsible for our post trade and data index business, will present the transaction in more detail.
And Gregor, as always, our CFO, will comment on the financials of the deal. As you are fully aware, M and A is one of the 3 pillars and a key element for growth of our Roadmap 2020. We introduced a strategic Roadmap 2020 end of May 2018, and we are executing since the elements of the roadmap consequently. The main focus of 2018, the 1st year of the strategic plan, was to improve the effectiveness of the organization and to grow organically. On the M and A side, we delivered some smaller deals last year and improved the process of screening and evaluating the market for external opportunities significantly.
Our main focus is to extend those businesses that are currently smaller scale, but have the biggest growth opportunities. We mentioned the data business as one of 5 potential growth areas in our strategic roadmap 2020. In the data and index business, we were faced with quite a few different potential avenues for inorganic growth. Our index business with a strong stocks and tax trends have a leading position in Europe, a very good track record top line and EBITDA growth and an extremely attractive profitability profile. From a strategic point of view, we realized that we needed to step up growth in particular beyond our classical freight index and structured product businesses where we are undoubtedly strong.
We realized from a strategic point of view, we need to penetrate the buy side with a top offering. Therefore, some of the key objectives in looking for a partner of our index business were a complementary product and service offering and improving access to the buy side, whose importance is ever increasing. With Axioma, we believe we have found the right partner. And with Sebastian and Seria, the Founder and CEO of Axioma, who we know and respect for many years, we have found the right intellectual and managerial leader to drive our efforts on the buy side further. We believe the combination of Actioma and our index business that has brought in at a very attractive valuation, forms the nucleus of a buy side intelligence leader that is uniquely positioned to benefit from trends that are reshaping the investment management industry.
As you are aware, yesterday, we entered into binding agreements on the acquisition of Axuma for $850,000,000 cash and debt free, which corresponds around 820,000,000 dollars worth of equity value. FUMA will be combined with our entire index business with stocks and DAX valued at €2,600,000,000 to create a new company. As part of the transaction, we entered into a strategic partnership with CinerAtlantic, a leading global growth equity firm and a recognized leader in deep tech and data. Serna Atlantic will invest around US750 $1,000,000 into the new company, which will be used to finance the acquisition of Axioma and thus become a minority investment. We are excited about the partnership with GA and believe it will help to further accelerate growth of the combined business and achieve strong value creation.
General Atlantic has an excellent track record of successful minority investments with corporates. With this structure, we are also preserving our firepower for additional potential M and A opportunities. Sebastian Cheria, the Founder and Curran CEO of Axioma, will lead its combined new company. Sebastian and 3rd members of the Axioma management will reinvest around $105,000,000 of the sales proceeds and also become shareholders of the new company. The combination of highly complementary and will create meaningful synergy opportunities, which includes product innovation and cross selling.
Furthermore, there are some efficiencies through scale and consolidation on the cost side. Overall, the strategic rationale and financial profile of this transaction are very compelling, and we hope you share our excitement about the future of the combined business. Now I will turn over to Stefan to provide an overview of Axioma and update on our index business as well as the strategic rationale of the transaction. Stefan, please.
Thank you, Theo, and good afternoon, everyone. Let me start with an overview of Axioma on Page 3 of the presentation. To begin with, we have known and worked with Sebastian and the Axioma team since 2011, and I'm thrilled to take this partnership to the next level. Xuma is a global provider of multi asset class portfolio and risk management software solutions with over 400 customers and over 7,000 professional users. As a recognized risk and data analytics solution provider, On industry leading scalable cloud based technology infrastructure, Axoma has grown rapidly with annualized contract value ACV, growing 23% per year since 2010.
A meaningful portion of Oxioma's revenue is supported by multiyear contracts, resulting in high revenue retention. Around 76% of Axioma's revenues come from software tools used for risk management, portfolio construction, the management for multiple asset classes. Software has been at the core of Axioma since the beginning and they were a very early adopter among software service providers that migrated to the cloud already in 2011. The team has done a great job of adapting the software suite and has demonstrated the ability to continuously innovate to create tailored solutions that meet customer demands. Evident has announced the best in class ratings of independent research providers like Gartner and the numerous industry awards over the years.
This puts Axioma on eye level with some of the larger and more well known providers in the space or even beyond. Around 17% of the revenues is derived from proprietary data, which includes in particular the factor libraries with over 43,000 entities worldwide. Axioma also has a dedicated research team and collaborates with customers to develop strategies and the technology platform that simplifies the completion of regulatory filings. Together, these revenues make up 7%. Let me come to our index business.
Slide 4 recaps the business with the contributing to the new company and gives you financials for the whole index business of Deutsche Browser as it will be part of the new venture. While in our segment reporting, we have historically only shown the revenues and EBITDA related to our stocks business. These numbers here also include the PAX franchise. In 2018, gross revenues totaled €168,000,000 and EBITDA €115,000,000 on a standalone basis. The index business commands a leading market position on a number of metrics, including Europe's number 1 tradable index and offers some of the most frequently traded index derivatives worldwide.
The business is an award winning innovator in premium tradable thematic and custom investment strategies and is very well positioned
for the trend to passive
and smart data as well as thematic investing. Existing in this business cooperation with Axioma around minimum variant products are a good example how complementary the 2 businesses are. Let me go further into the details of that complementarity. I'll turn to the next page. Given the high complementarity of client focus, regional footprint and revenue model, The union of Axioma and Deutsche Borse's Index business is highly synergistic.
The combination of Axioma's Risk Analytics and Deutsche Borse's Index business creates a unique offering with full end to end coverage across investment strategy, modules and underlying acquisitions. As very well for the benefit of the macro trends in the investment industry. The open architecture approach was exemplified in Axioma's recent partnership with FactSet as well as State Street and Charles River with an exceptional technology edge around the cloud native software that I mentioned makes the combined business future proof. Combined with the stock's customization capabilities to address attractive growing market segments and increase scale at the same time. Let me continue with an overview of the synergies on Slide 6 of the presentation.
The combined company is expected to significantly grow revenue and addressing margin trends and client needs. Furthermore, it is expected to achieve approximately €30,000,000 of synergies on an annualized pre tax run rate basis by the end of 2021. Around 70% of the synergies are expected to come from revenues as we believe that by combining our product offering and complementary customer bases, there will be opportunity to drive additional revenue growth through the introduction of new products and cross selling. Around 30% of the synergies are expected to come from costs through a number of optimizations and consolidations to operations. We will continue to explore additional synergies and many ideas beyond the immediate FOX environment into the wider group exist.
We will share that with you at the appropriate time. I will now turn over to you, Gregor.
Yes. Thank you, Stefan, and welcome, ladies and gentlemen. The transaction structure, as outlined on Page 7, unlocks the value of our index business, preserves our firepower to look at other potential external growth opportunities and ensures value creation. As the first step of the transaction, Deutsche Browser will transfer its index business tax and stock into a new company. The new company will then be combined with Axioma.
General Atlantic will provide the capital to fund the Axioma acquisition. Axioma management also wrote a portion of their sales proceeds into the new company, demonstrating their conviction in our company and the broader market. We believe this is an ideal structure for the transaction as it's cash neutral for us, preserves our balance sheet flexibility and enables us to grow our index business in an entrepreneurial way. We are also excited to partner with General Atlantic, who we have known well for a long time. As we have underscored throughout the presentation, General Atlantic is a very good partner for the new company.
They are investing patient capital with a long term investment horizon. J. A. Support and experience capitalizing growth companies makes them much more than simply a provider of capital. GA is a leading growth investor and has deep data and technology expertise, which will be beneficial to both the combined company and the group.
They are well experienced in minority investments and in working with corporate. We are excited to take our existing relationship with GA to the next level with this transaction. We would like to highlight that as part of this partnership, Deutsche Borse will control the Board of the combined company and the business will continue to be a core Deutsche Borse asset going forward. Turning to Slide 9. We believe this transaction will drive strong value creation as a result of macro trends, scale and product expansion at Axioma and substantial synergies.
Our value creation expectations in this transaction are aligned with the approach and investments of most of the private equity firms. Average annual growth of the equity value of more than 15%, which a private equity investor is typically targeting, which resides in at least doubling the size of the new company over 5 years. Please note that the increased value of the new company can only be realized at the time of the potential exit of GA. In the meantime, the impact on the earnings per share is slightly dilutive, mainly because the increased equity value of the new company cannot be reflected in the income statement on an ongoing basis. I'm now turning back to you, Thierberg.
Thank you, Stefan and Gregor. I'd like to echo my comments at the start here. I'm certain that this transaction will be very beneficial for all shareholders, customers and employees of both Deutsche Borse and Axioma. The transaction is in line with our 2020 road map and has a strong business rationale given Axioma's broad side access and world class analytics and the complementary overlap between the two businesses. We are very happy about CinerAtlantic's involvement, and this will help to drive growth at market and technology expertise as well as potentially open up further inorganic growth opportunities to complement the new company.
We also very much appreciate the continued commitment of Axioma senior leadership as well as the equity investment in the new company. Sebastian has been a driving force behind Axioma since it was founded. And as we look to accelerate growth in the coming years, we are confident that he is the right person to lead the combined company. Thank you for your attention. We are now happy to take your questions, please.
And the first question comes from Johannes Thormann, HSBC. Please go ahead with your question.
Good afternoon, everybody. Johannes from HSBC. Just a question on the exit terms of the deal. You guide for 5 years horizon. Can you be a bit more explicit on if General Electric has General Atlantic, sorry, has a put option or if you only have a call option?
And then what are the conditions of this deal? Thank you very much.
Stefan, would you please respond?
The terms that we have agreed with China Atlantic are customary for these type of transactions and they include a number of avenues that give us all degrees of freedom to Petrobras. But do you have a call option or a put option? How do they have a put option? We have the necessary corn rights.
Okay. Thank you.
The next question comes from Arnaud Giblanc.
I've got 2 quick questions, if I may. Firstly, I was wondering if you could give us a bit more detail in terms of the earnings contribution as a settlement company you listed from Acxiom in 2021, 2022. Also, you're talking about run rate synergies of €30,000,000 by the end of 2021. Does that mean synergies achieved in 2022? And my second question is, given that you are creating a new company and you're putting the 2 stock tax and actual mine into a new vehicle and with private equity on board, my assumption would be that, that new vehicle, that new company will be looking at the acquisitions.
Is that the case? And how would the leverage taken on at the vehicle level affect the AA rating of the group? Does any dip taken on by the new stocks company affect the 1.5x restricted dividend as necessary for digital scrip for AA rating?
Thank you for the question, Arnaud. This is clearly a question for the CFO. Gregor?
Yes, thanks. So starting with your first question, it's not planned that this new company will take additional debt to finance additional M and A.
So we do
M and A from a Deutsche Perce perspective. And therefore, you are aware that we still have unchanged the firepower of €1,500,000,000 And you know that we are ready to do M and A in all of these five areas, but we already communicated. So now we did the first transaction. And so if we would find another interesting asset, so we would use that higher power on group level. Your first question with regard to the earnings contribution over the next years.
So you see in our slide that the revenue growth rate over the last 10 years was 20% and plus. So for Axioma, and so that's also our expectation for the next year that the growth rate will continue on that basis. With regards to the earnings, you are aware that the money the Axioma earned over the past was completely reinvested into the business to create new IT, new connectivity to customers. So over time, so we expect that the earnings will increase to a reasonable level. So we will work on the cost basis here, but the focus is really to create additional growth here.
With regard to the STOXX asset, so unchanged our view, we expect double digit revenue growth as you have seen over the last 3 years, where this asset increased by 12 percent. So it's our target to further have double digit growth here. And the more combined cases will be a very attractive growth rate.
Thank you.
The next question comes from Greg Doucambault, JPMorgan. Please go ahead with your question.
Hi. Good afternoon. Just a couple of questions. Firstly, in terms of the template that you've used for this deal, I. E, the partnership with a productivity firm, is that, let's say, you envisage using in the future?
And in terms and the second question is in terms of the profitability of that revenue, how should we think about further Obviously, revenue has been particularly strong. Is there further investment needed in that business?
Something I should pick up, Patrick. I should pick up the first one. We have indeed used a template for the partnership, which is a market standard, by
the way.
And we have done this deal specifically. I'm not saying that we are contemplating in future similar deals. This is not the case. We will look at each and every deal on an individual basis. On the profitability, I hand it over to Stefan ideally.
Yes. So to answer your question around the further investment requirements, we believe that Xtuma, obviously, on an ongoing basis is continuing to invest in the software that it has still in development. However, they have gone through big waves of doing that. Our focus therefore will be on building profitability from the growth and using the scale effects as well as the question that was raised earlier around selective M and A investments where appropriate. Okay.
Thank you.
The next question comes from Philip Middleton, Rowland. Please go ahead with your question.
Yes. Thank you.
I mean, it looks very interesting deal. One thing I wonder if you can tell me is looking at where you're looking to drive extra revenues, you talk about things like new index concepts and additional benchmark sales to Axomi clients. Is this from cap weighted indices or the factor indices? Do you think you've got a competitive set of index products to sell compared to, say, an MSCI or Morgan Stanley in the cap weighted sphere? Or are you going
to have to put investments in there?
Or what exactly is underpinning your idea of building out your benchmark sales and the index concepts you talk about?
Stefan?
So in a number of directions. The first is that we have under penetration also regionally in particular in the U. S. Where Axiomo has a broad and a big part of its client base. Where we so far have stocks total underrepresentation.
Then you rightfully highlighted that the big trend towards smart data and factor is gaining a lot of momentum, in particular, again, when accompanied by the IT tools and the portfolio optimization and risk measurement tools that are required to run these types of portfolio approaches, we see a big expansion potential there. And finally, with respect to the completeness of the range of our stocks product offering, yes, we have a complete product offering, but clearly in some of the geographies, the visibility is different and the brand recognition is different. So again, we hope really that from especially towards the key trend of customized index products and that's where SOXA and LUXTOMA have a very distinctive approach compared to some other brand names that are very much client centric in their customization approach. And that's where we see further benefits to also gain market share.
The next question comes from Anno Scharmer, Morgan Stanley.
Just two questions, please. The first one was, could you just elaborate on what would be the dis synergies as you take stocks out of the group and you put it into a new company and how we should think about those? And then the second one, just a follow-up on Philip's question really, about the revenues. You mentioned that the company has been working together for
a while before this deal.
So where are the sort of low hanging fruit in terms of revenue synergies? So anything in the sort of mid term in the next 6 months that could be done quite quickly? And just on the market share point you're talking about there, could you give us some numbers as to kind of what you think the combined businesses market share would be? And what does your 2024 target imply?
I mean, from my side, Teodor speaking, on the first question, dis synergies, we do not see any kind of dis synergies in this deal. All to the contrary, it's a perfect complementary set of skills, right? And therefore, we have in fact affected him and we do not expect any kind of dis synergies, Right? On the low hanging fruits, Stefan,
please? So
the low hanging fruits, in particular, related to what I mentioned earlier in the U. S. Market penetration that we have sort of a big gap to close also due to the limited sales force efforts will virtually and as soon as we can, at the back of the closing, expect really to drive sort of drive short term synergies in the combination. Now with respect to your market share question, let me back this slightly because I think the definitional frame what is the right market shares between on the one hand side, what is the combined business, what is the spending with respect to the total sort of infrastructure side versus on the other side, more narrowly the index spending. There are no more widely recognized numbers available.
But as I said earlier, I think we have a distinctive offering, which will allow us to gain critical mandates from competitors over time.
Okay. That's helpful. Thank you.
The next question comes from Michel Ram of UBS. Please go ahead with your question.
Thank you. Mike Werner here from UBS. Two questions. I guess this is, as you mentioned earlier, a relatively new template from a transactional perspective for Deutsche Borse. Is Deutsche Borse would you be willing to consider a minority stake ultimately in this combined business if you continue to see more transactions like this where you ultimately see stake in the combined enterprise?
And then second, following the completion of this deal, where do you see the potential gaps in terms of products and services for the combined entity?
Mike, from my side to the first question, indeed, and we should not be in any kind unclear about our strategic avenue here. We want to keep the business. We don't want to get into a minority stake position for the foreseeable future. We like the idea of having such a business. We want to grow the business going forward, and General Atlantic is a perfect partner to grow the business and to exit the business after 5 years or so.
And therefore, it's not intended that you go into a minority position, at least not for the foreseeable future. What was the second question?
On your second question, yes, happy to take that. After completion, what are the growth areas? I would call it growth areas rather than caps in both areas, on the one hand side, on the index side. For sure, there is a continued process of consolidation in branded indices, which we would be open minded in some of these places, which stocks that has, for sure, significant strength on the equity and European side. To broaden that, we believe there is still room and the process of consultation is ongoing.
On the software side, I think in particular on the solution side, I think in particular that the opportunity to broaden the offering beyond the portfolio construction and risk management modules, which are the most important. There has an expansion that Axiomo has been driving into multi asset class. I do believe that the fixed income side there in terms of gaining depth and how factor models there are applied is an area that we would see as something where we can have a match and where we want to see more expansion.
And the next question comes from Roland Senderovo.
Could you maybe talk a little bit about the Could you maybe talk a little
bit about the integration costs you see
out of the deal, maybe also about
the management incentive structure and related costs? And maybe lastly, when do you think the deal would be EPS neutral from your point of view? Thank you.
Stefan, do you want to kick off?
Yes. On the integration costs beyond the sort of acquisition and the transaction related costs over the next few months and the carve out that we mentioned in terms of our tax business, we do not expect really material integration costs to be required since the software systems of Xuma really run on a stand alone basis and interfaces on an API basis are are very standardized and already elements that we have in place. I think that's on the integration costs and on the management incentives and the dilution and acquisition breakeven. I don't know whether you want to comment or otherwise, I'd like to continue.
Yes, I can do it. So with regard to the management incentive program, obviously, it was very important for us that we keep the existing management in place and it was our interest. So that's first. Secondly, we introduced the management incentive program, what is a market standard within the private equity community. And with regard to EPS, so as I mentioned, so in the 1st years, it's from an P and L, IFRS earnings perspective, it's slightly dilutive.
But obviously, the faster we can implement our synergies, the better we are able to deliver on our growth perspective, the faster we will achieve also on an earnings perspective neutrality. But really the big thing what we are targeting for is really and that is not reflected in MP and L is to create additional value. So making out of that 3,300,000,000, hopefully more than 6.6 €1,000,000,000 over the next 5 years and that would be mean we would increase our returns every year by 15%. So that's the way we look at it. Okay.
Thank you.
All right. There are no further questions in the pipeline. So therefore, we would like to conclude today's call. Thank you very much for your participation, and have a good day.
The conference is no longer being recorded.