The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to the Deutsche Börse M&A conference call. At this time, all participants are 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 Börse and Axioma operate may differ materially from those 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 Börse 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 Theodor Weimer, Chief Executive Officer of Deutsche Börse, Gregor Pottmeyer, Chief Financial Officer, and Stephan Leithner, Executive Board Member responsible for post-trading, data, and index. Theodor, Stephan, and Gregor will take you through the presentation. After the presentation, we will be happy to take your questions. The presentation material for the call has been sent out via email earlier today and can also be downloaded from the investor relations section of our website. As usual, this conference call will be recorded and is available for replay. Let me now hand over to you, Theodor.
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 the strategic rationale behind the deal. Later on, Stephan Leithner, 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&A is one of the three pillars and a key element for growth of our Roadmap 2020. We introduced the strategic Roadmap 2020 end of May 2018, and we are executing since the elements of the roadmap consequently. The main focus of 2018, the first year of the strategic plan, was to improve the effectiveness of the organization and to grow organically.
On the M&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 five 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 the strong STOXX and DAX brands have a leading position in Europe, a very good track record of 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 traded 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. With Sebastian Ceria, the Founder and Chief Executive Officer of Axioma, who we know and respect for many years, we have found the right intellectual and mature leader to drive our efforts on the buy side further. We believe the combination of Axioma and our index business that are 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 Axioma for $850 million cash and debt-free, which corresponds to around $820 million equity value. Axioma will be combined with our entire index business with STOXX and DAX valued at EUR 2.6 billion to create a new company. As part of the transaction, we have entered into a strategic partnership with General Atlantic, a leading global growth equity firm and a recognized leader in deep tech and data. General Atlantic will invest around $750 million 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&A opportunities. Sebastian Ceria, the Founder and Chief Executive Officer of Axioma, will lead this combined new company. Sebastian and certain members of the Axioma management will reinvest around $105 million of the sales proceeds and also become shareholders of the new company. The combination of highly complementary, and will create meaningful synergy opportunities, which include product innovation and cross-selling. Furthermore, there are some efficiencies from the 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. I will turn over to Stephan to provide an overview of Axioma and update on our index business as well as the strategic rationale of the transaction. Stephan, please.
Thank you, Theodor, and good afternoon, everyone. Let me start with an overview of Axioma on page three of the presentation. To begin with, we have known and worked with Sebastian and the Axioma team since 2011, and are thrilled to take this partnership to the next level. Axioma 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 built on industry-leading scalable cloud-based technology infrastructure, Axioma has grown rapidly, with annualized contract value, ACV, growing 23% per year since 2010. A meaningful portion of Axioma's revenue is supported by multi-year contracts, resulting in high revenue retention. Around 76% of Axioma's revenues come from software tools used for risk management, portfolio construction, and 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. Evidence for that, 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 equities worldwide. Axioma also has a dedicated research team that collaborates with customers to develop investment strategies and a technology platform that simplifies the completion of regulatory filings.
Together, these revenues make up 7%. Let me come to our index business. Slide four recaps the business will be contributing to the new company and gives you financials for the whole index business of Deutsche Börse, 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 STOXX business. These numbers here also include the DAX franchise. In 2018, gross revenues totaled EUR 168 million and EBITDA EUR 115 million on a standalone basis. The index business commands a leading market position on a number of metrics, including Europe's number one 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 beta, as well as thematic investing.
Existing index business cooperation with Axioma around minimum variance products are a good example how complementary the two businesses are. Let me go further into the details of that complementarity. We turn to the next page. Given the high complementarity of client focus, regional footprint, and revenue model, the union of Axioma and Deutsche Börse's index business is highly synergistic. The combination of Axioma's risk analytics and Deutsche Börse's index business creates a unique offering with full end-to-end coverage across investment strategy, modules, and underlying and positions. It adds very well to the benefit of the macro trends in the investment industry. The open architecture approach is 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 STOXX 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 six of the presentation. The combined company is expected to significantly grow revenue and EBITDA by addressing market trends and client needs. Furthermore, it is expected to achieve approximately EUR 30 million 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 consolidation to operations.
We will continue to explore additional synergies and many ideas beyond the immediate STOXX environment introduced a wider group exist. We will share that with you at the appropriate time. I will now turn over to you, Gregor.
Thank you, Stephan, and welcome, ladies and gentlemen. The transaction structure, as outlined on page seven, 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 Börse will transfer its index business, DAX, and STOXX 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 holds 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. GA's support and experience catalyzing 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 investment and in working with corporates. 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 Börse will control the board of the combined company, and the business will continue to be a core Deutsche Börse asset going forward. Turning to slide nine. 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 investment 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 results in at least doubling the size of the new company over five 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 am now turning back to you, Theodore.
Thank you, Stephan and Gregor. I would like to echo my comments at the start here. I am certain that this transaction will be very beneficial for all shareholders, customers, and employees of both Deutsche Börse and Axioma. The transaction is in line with our Roadmap 2020 and has a strong business rationale given Axioma's broad buy-side access and world-class analytics, and the complementary overlap between the two businesses. 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's senior leadership, as well as their equity investment in the new company.
Sebastian has been a driving force behind Axioma since it was founded. 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.
Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. We kindly ask all participants to limit their questions to one per person. Please press nine and star to state your questions. The first question comes from Yannis Tormann, HSBC. Please go ahead with your question.
Good afternoon, everybody. Yannis Tormann, HSBC. Just a question on the exit terms of the deal. You guide for five years horizon. Can you be a bit more explicit on if General Atlantic 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.
Stephan, would you please respond? The terms that we have agreed with General Atlantic are customary for these type of transactions, and they include a number of avenues but give us all degrees of freedom with Deutsche Börse.
Do we have a call option or a put option, or do they have a put option?
We have the necessary call rights.
Okay. Thank you.
The next question comes from Arnaud Giblat. Please go ahead with the question.
Hi. I've got two 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 standalone company you'd expect from Axioma in 2021, 2022. Also, you're talking about run rate synergies of EUR 30 million by the end of 2021. Does that mean synergies achieved in 2022? My second question is, given that you are creating a new company and you're putting the two, STOXX and Axioma 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 doing 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 debt taken on by the new STOXX company affect the one and a half times debt that's necessary for Deutsche Börse Group for its AA rating?
Thank you for the question, Arnaud. This is clearly a question for the CFO. Gregor?
Yeah, thanks. Starting with your first question, though, it's not planned that this new company will take additional debt to finance additional M&A. We do M&A from a Deutsche Börse perspective, and therefore, you are aware that we still have unchanged the firepower of EUR 1.5 billion, and you know that we are ready to do M&A in all of these five areas that we already communicated. Now we did the first one, Axioma, if we would find another interesting asset, we would use that firepower on group level. Your first question with regard to the earnings contribution over the next years. You've seen our slide that the revenue growth rate over the last 10 years was 20% and plus, for Axioma, that's also our expectation for the next year, that the growth rate will continue on that basis.
With regard to the earnings, you are aware that the money that Axioma earned over the past was completely reinvested into the business to create new IT, new connectivity to customers. Over time, we expect that the earnings will increase to a reasonable level. We will work on the cost basis here, but the focus is really to create additional growth here. With regard to the STOXX assets, unchanged our view. We expect double-digit revenue growth. As you have seen over the last three years, this asset increased by 12%, it's our target to further have double-digit growth here, and on a combined basis will be a very attractive growth rate.
Thank you.
The next question comes from Gautam Goyal, JPMorgan. Please go ahead with your question.
Hi. Good morning. 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 private equity firm, is that something you envisage using in the future? The second question is, in terms of the profitability of Axioma, how should we think about further investment needed in that business? Obviously, revenue growth has been particularly strong. Is there further investment needed in that business?
I think I should pick up the first one. We have indeed used the template for the partnership, which is a market standard, by the way. We have done this deal specifically. I'm not saying that we are contemplating any future similar deals. This is not a case. We will look at each and every deal on an individual basis. On the profitability, I hand it over to Stephan, ideally.
Yes. I have to answer your question around the further investment requirements. We believe that Axioma, 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 asked earlier around selective M&A investments where appropriate.
Okay. Thank you.
The next question comes from Philip Middleton. Please go ahead with your question.
Yeah, thank you. It looks a very interesting deal. One thing I wonder if you could 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 Axioma 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 a Morgan Stanley in the cap-weighted sphere? Are you going to have to put investments in there? What exactly is underpinning your idea of building out your benchmark sales and the index concepts you talk about?
Stephan?
In a number of directions, the first is that we have a very significant under-penetration also regionally, in particular in the U.S., where Axioma has a broad and a big part of its client base, where we so far have a STOXX total under-representation. You rightfully highlighted that the big trend towards smart beta 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. Finally, with respect to the completeness of the range of our STOXX 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.
Again, we hope really that from especially towards the key trend of customized index products, and that's where STOXX and Axioma have a very distinctive approach compared to some other brand names, that they're very much client-centric in their customization approach. That's where we see further benefits to also gain market share.
Okay. Thank you.
The next question comes from Anuj Sharma, Morgan Stanley. Please go ahead with your question.
Hello. Just two questions, please. The first one was, could you just elaborate on what would be the dyssynergies as you take STOXX out of the group and you put it into the new company, and how we should think about those? The second one, just to follow up on Philip's question, really, about the revenues. You mentioned that the company's been working together for a while before this deal. Where are the low-hanging fruit in terms of revenue synergies? Anything in the near term in the next six months that could be done quite quickly? On the market share point you were talking about there, could you give us some numbers as to what you think the combined business' market share would be, and what does your 2024 target imply? Thank you.
Anuj, from my side, generally speaking, on the first question, dyssynergies, we do not see any kind of dyssynergies in this deal. On the contrary, it's a perfect complementary set of skills, right? Therefore, we have in fact affected him, and we do not expect any kind of dyssynergies. Right, on the low-hanging fruit, Stephan, please.
The low-hanging fruits in particular are related to what I mentioned earlier in the U.S. market penetration, where we have a big gap to close, also due to the limited sales force efforts, as soon as we can, the bulk of the closing expect really to drive short-term synergies in the combination. With respect to your market share question, let me tack 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 infrastructure side, versus on the other side, more narrowly the index spending. There are no more widely recognized numbers available. 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 Michael Werner, UBS. Please go ahead with the 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 Börse. Is Deutsche Börse, 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? Second, following the completion of this deal, where do you see the potential gaps in terms of products and services for the combined entity? Thank you.
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 five years or so. It's not intended that we 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 gaps. In both areas, on the one hand side, on the index side, for sure, there is a continuing process of consolidation in branded indices, which we would be open-minded in some of these cases, which, STOXX that has for sure significant strength on the equity and European side. To broaden that, we believe there is still room in 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 Axioma has been driving into multi-asset class.
I do believe that the fixed income side there, but in terms of gaining depth in 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.
Thank you.
The next question comes from Roland Zander, Oddo. Please go ahead with your question.
Good afternoon. 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. Maybe lastly, when do you think the deal would be EPS neutral from your point of view? Thank you.
Stephan, 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 DAX business, we do not expect really material integration costs to be required since the software systems of Axioma really run on a standalone basis, and the interfaces on an API basis are very standardized and already elements that we have in place. I think that's on the integration cost and on the management incentives and the dilution and acquisition breakeven. Gregor, I don't know whether you want to comment or otherwise happy to continue.
Yeah, I can do it. As we get 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. That's first. Secondly, we introduced the management incentive program what is market standard within the private equity community. With regard to EPS, as I mentioned, in the first years it's from an P&L, IFRS earnings perspective, it's slightly diluted. 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 the earnings perspective, neutrality. Really the big thing, what we are targeting for is really, and that is not reflected in a P&L, is to create additional value. Making out of that EUR 3.3 billion, hopefully more than EUR 6.6 billion over the next five years.
That would mean we would increase our returns every year by 15%. 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.