Good day. Welcome, ladies and gentlemen, to the Moody's acquisition of Bureau van Dijk conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for question and answers following the presentation. I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations and Communications. Please go ahead.
Thank you. Good morning, everyone. Thanks for joining us on this teleconference to discuss Moody's acquisition of Bureau van Dijk, which we announced earlier this morning. I am Salli Schwartz, Global Head of Investor Relations and Communications. The press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning are Mark Almeida, President of Moody's Analytics, and Linda Huber, Moody's Executive Vice President and Chief Financial Officer. Before we begin, I call your attention to the safe harbor language, which can be found toward the end of the press release issued by the company earlier today regarding Moody's entering into a definitive agreement to acquire Bureau van Dijk.
Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31st, 2016, and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission's website. These, together with the safe harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Ray McDaniel.
Thanks, Salli. Good morning. Thank you to everyone for joining today's call. Earlier this morning, we announced that Moody's entered into a definitive agreement to acquire Bureau van Dijk, or BvD, a global provider of company information and business intelligence for EUR 3 billion. We are very pleased to be able to add this very successful and highly complementary business, which builds on Moody's role as a global provider of credit risk measures and analytical insights. BvD aggregates, standardizes, and distributes one of the world's most extensive private company data sets. The business is well established with a history going back more than 30 years. Consistent financial performance is a core characteristic of BvD's business. Over the past decade, BvD has delivered top-line growth and margin expansion year in and year out.
Since 2006, revenue has grown at a 9.3% compound annual growth rate, and BvD's EBITDA margin has been expanded from 38% to 51%. Additionally, BvD sells its data and information products almost entirely on a subscription basis. This generates not only very strong, but also very reliable cash flows. In 2016, recurring revenue accounted for more than 90% of total revenue. BvD consistently achieves renewal rates that exceed 90%, reflecting the high quality of the company's products. On top of BvD's very attractive standalone financial performance, we expect to realize approximately $45 million in annual revenue and expense synergies by 2019, with those synergies growing to approximately $80 million by 2021. As we execute on these plans, BvD's scale and profitability will quickly deliver positive benefits to Moody's overall financial performance.
On a GAAP basis, we expect the acquisition to be accretive to Moody's EPS in 2019. Excluding purchase price amortization and one-time integration costs, we expect it to be accretive to EPS next year. With the addition of BvD to our operations, we are increasing the long-term growth outlook for Moody's. Our revised expectation for long-term revenue growth is now high single-digit % from the previous mid to high single-digit %, and EPS growth accelerates to the low teens % from the previous high single-digit to low double-digit %. Notably, we will use approximately $1.3 billion of offshore cash to fund this acquisition, with the remainder funded by approximately $2 billion from a new public debt financing, a term loan, and commercial paper.
I've talked with you before about Moody's focus on standards businesses, meaning those businesses whose products and services contribute to the robust and efficient functioning of financial markets. Combined with our mission to help customers improve their understanding, measurement, and management of risk, BvD's extensive data and business intelligence fits squarely within our strategic framework. Additionally, this acquisition positions Moody's more deeply in the financial information value chain, from data to curated information to risk models, analysis, and opinions, and ultimately through to enterprise risk solutions. Now I'll briefly illustrate the unique role that BvD provides in the information space. First, BvD's platforms deliver data on more than 220 million private companies around the world. This represents a very substantial set of unique information.
Second, as Mark Almeida will discuss more thoroughly in just a minute, BvD has extensive capabilities around making that data consistent and comparable across industries and geographies. Third, BvD has long-established relationships with more than 160 third-party information providers. Fourth, BvD's customers include users at more than 6,000 unique institutions, representing substantially every industry as well as numerous governmental authorities. These customers apply data delivered by BvD to a wide variety of business and analytical needs. With this context, you can see how BvD has contributed to the development of a unique data ecosystem, and how it plays a critical role in bringing the sources and users of information together, and in the process, improves the quality, quantity, and transparency, in other words, the value of that information. Before I turn the call over to Mark, I want to reinforce our enthusiasm about this acquisition.
As you can see, BvD is a very strong business that complements our existing offerings and provides us many exciting expansion opportunities. Now let me turn this over to Mark.
Thanks. As Ray just mentioned, Bureau van Dijk maintains an impressive collection of data elements on hundreds of millions of private companies sourced through its diverse global network of information providers. BvD's value proposition flows from, first, its specialized sourcing process, and second, its efficient data management capabilities, enabling it to deliver value-added products for its customers. You can think of BvD as participating in a vast network with information suppliers on one end and consumers of data on the other. Bureau van Dijk sits at the center of this network. It identifies new data sources, often in response to customer requests, to add to its information archive. The company then applies its processes to cleanse, standardize, and integrate new and updated content. As more data is contributed to Bureau van Dijk's platform, more users are drawn to the company's products in search of the information they need.
The resulting network effects bring even more suppliers and more customers to Bureau van Dijk's platform. These dynamics help explain the strong and consistent growth that the company has generated, as Ray described a moment ago. With the expansion of its data coverage and customer base, Bureau van Dijk now serves professionals across multiple domains in business and government. These customers rely on BvD for information that is relevant to credit analysis, investment research, tax planning, compliance, procurement, and other business challenges. On this slide, we list the activities and job functions that frequently rely on the Bureau van Dijk platform. Clearly, some align directly with customers served by Moody's Analytics, while others represent opportunities for us to extend our reach into new customer types and serve additional professional disciplines. Extending MA's reach into non-financial customer segments is only one of the revenue growth opportunities that we will pursue.
Given Bureau van Dijk's fit with Moody's, we see many ways to realize synergies on both the revenue and expense lines. Immediate top-line synergies include cross-selling to our respective customer bases, leveraging Moody's brand and distribution channels to further expand BvD's customer penetration, especially outside of Europe, and combining their data with MA's analytical tools. On the expense side, we've identified potential reductions in real estate and other overhead costs and savings from streamlined product development. I'll make a few concluding remarks about the compelling industrial logic of this acquisition. First, the strength of Bureau van Dijk's private company data franchise, together with Moody's longstanding position as a leading provider of public company credit risk opinions, enables both MIS and MA to provide enhanced analysis of small and medium-sized enterprises. In addition, there are important opportunities to integrate BvD's platform into our risk models and other solutions.
Today, some MA customers use data from Bureau van Dijk to drive credit models and analytical platforms that we provide. We plan to create more seamless integration across our products, giving our customers the solutions they need to operate in today's challenging business environment. We also believe that we can make elements of Moody's core risk product offerings relevant to Bureau van Dijk's extensive relationships with non-financial customers. Finally, with access to a wealth of data and intelligence covering a wide range of risk disciplines, Moody's will explore important opportunities to apply our insights, opinions, and assessments to new domain areas beyond credit. Each of these ideas represents a significant opportunity. Taken together, they illustrate the rich source of growth potential that this transaction presents for Moody's. We are very eager to pursue that potential with our new colleagues at Bureau van Dijk.
From here, I'll turn the conversation over to Linda to discuss select financial aspects of the acquisition.
Thanks, Mark. I'll make a few comments on timing, financing, and our reporting plans. First, our acquisition of Bureau van Dijk is subject to regulatory approval in the European Union and is expected to close late in the third quarter of this year. Second, we will take several steps to fund the EUR 3 billion purchase price. Importantly, we will use $1.3 billion of our $1.9 billion of offshore cash holdings to fund this transaction. At signing, we have $1.5 billion of committed financing in the form of a bridge loan. Between signing and closing, we will issue approximately $2 billion of debt, including approximately $500 million of commercial paper, a $500 million term loan, and $1 billion of new long-term bonds.
Regarding share repurchase, we expect to reduce our 2017 and 2018 share repurchase programs to approximately $200 million in each year. In 2019, we will give further guidance regarding share repurchase. Once we have completed our de-leveraging following this transaction, we expect to return to share repurchase more in line with our historical practices. Lastly, regarding dividends, we anticipate maintaining our current dividend policy of approximately 25%-30% payout of net income. Before we move to Q&A, I'd like to reemphasize what we've been able to accomplish with this transaction. As Mark noted, BvD adds capacity to MA's most attractive business, given its powerful products, extensive customer base, and geographic footprint. We see many opportunities to enhance our combined businesses. As Ray highlighted, on a GAAP basis, we expect the acquisition to be accretive to Moody's EPS in 2019.
Excluding purchase price amortization and one-time integration costs, we expect it to be accretive to EPS in 2018. BvD will also provide the opportunity to increase the long-term growth outlook for Moody's Corporation. Finally, we are pleased to be able to invest a significant portion of our offshore cash holdings into a high-return, synergistic business that is well in line with Moody's mission and core capabilities. This concludes our prepared remarks. We'd be pleased to take any questions you might have.
Thank you. Ladies and gentlemen, Moody's asks that you limit yourself to one question with a brief follow-up. You are then welcome to rejoin the queue for any additional questions you may have. If you would like to ask a question, please dial star one on your telephone keypad. If you are using a speakerphone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. Again, that is star one to ask a question. Our first question comes from Warren Gardiner of Evercore.
Hey, good morning, guys. Just a quick question on the revenue and cost synergies of the $80 million. Can you just give us a rough breakdown, the cost versus revenue?
Sure. As we've talked about, it is a combination of both revenue and cost synergies. By 2021, that $80 million synergy target should be roughly split equally between revenue and expense.
Got it. Okay. Just a quick one on the accretion. Are you guys using consensus estimates for the base in that calculation?
It's Linda. We're using our own internal estimates, Warren.
Oh, okay. Thank you.
We'll go next to Alex Kramm of UBS.
Hey, good morning, everyone. Just more bigger picture, I guess. I think historically, you guys have been viewed as the ratings pure play in the marketplace, and I think you've said, or I think generally that business is acknowledged as one of the best businesses in the world. The bar has always been very high to diversify. Now, what's the portfolio rationale for this acquisition, I guess is the question. I understand it's a great business, but analytics often has been viewed as a distractor of the story, and it's been slowing this year, and now you're kind of doubling down on that. Just wondering about the, I guess, portfolio rationale of not focusing on your core strength and kind of diversifying a little bit away from that.
Well, I'll let Mark comment in a little more detail, but I would start by saying this is focusing exactly on our core capabilities. The ability to provide the marketplace with comprehensive financial information presented in a globally consistent manner is something that we have done for decades and decades with respect to public companies and has been the essential heart of our RD&A research offering in Moody's Analytics. That is a very profitable segment for Moody's, and it is going to be even more so with the addition of Bureau van Dijk. Mark, I don't know if you wanted to add anything to that.
First, Alex, I'll do my best not to take it personally that you referred to me as a distraction.
Is that how you got here, Mark?
I agree 100% with Ray. We feel that this is very much in line with Moody's overall value proposition. It builds out the work we're doing in MA. As we've described, we see lots of immediate synergies. We also see some very interesting longer-term opportunities for us to do some very creative things that frankly, we haven't even put numbers against at this point. This doesn't reflect any lack of confidence or enthusiasm about the rating business. As you said, it's a great business, and we expect it to continue to be a great business. We found a very unique asset here, and we look forward to doing a lot with it.
Yeah. I'd just add on two things, I think, really. First of all, this is also a resource that's going to be available to Moody's Investors Service. You have seen from some of our past activity that MIS has been moving further into the small and medium-sized enterprise sector. Those are private companies. Those are the companies that are at the heart of the information that is collected and curated by BvD. It is a resource to both Moody's Analytics, obviously, but it's also a resource to Moody's Investors Service. As such, we think that it's very consistent with what we have already been offering. It's just expanding into the private company sector. Same kind of information, insight, research, but to a different part of the credit pyramid.
All right. Thank you. Then just a quick one on the, I guess, the accretion math. One, when you say it's accretive, you mentioned the share buybacks are going to be lower. Is that factoring in the opportunity cost? Meaning, obviously share buybacks can be accretive. Just want to make sure that that's how you're really factoring the opportunity cost. Then is the accounting switching, are you going to back out intangible amortization going forward? That's it. Thank you.
Sure, Alex, it's Linda. We have modeled this using the new assumption of $200 million of share repurchase in both 2018 and 2019. We have considered the opportunity cost of repurchasing shares, we feel that this acquisition is positive to Moody's shareholders, in fact, more accretive and more important to Moody's shareholders than would be repurchasing stock. As we move into 2019, as we said, we'll look to get back to something more in line with our historical patterns in share repurchase. We'll give guidance on that at the time, and that decision will be subject to the factors that we usually consider when we decide how much stock to repurchase. Regarding accounting changes, for right now, we are continuing the same policy that we've had, and we'll have further information on this transaction and our reporting on the second quarter earnings call.
Thank you very much.
Sure.
We'll go next to Joseph Verrasi of Cantor Fitzgerald.
Hi. My first question was just a little background on the asset itself. Why was it available, and were you the only bidder, and how long have you known the company?
Yeah. We've known the company quite well for a long time. We've always thought it's a very attractive business. As a matter of fact, we're a customer of the company. I think in terms of were we the only bidder, early on Moody's and the Bureau van Dijk management concluded that we were the best natural fit for this business. We prefer, as you've seen from our history, to stay out of auctions, and we have done so in this case.
Okay, just secondly, around the valuation of the acquisition, can you help us better understand the dynamics there? What made you sort of comfortable paying this multiple, particularly in relationship to your own particular multiple? Thanks.
Linda, do you want to take that?
Yes. We think that this deal is a very good strategic fit. I think it's a unique asset. We've looked at it on a number of valuation metrics. It meets or exceeds most of those acquisition criteria, on others, it misses, just barely, just modestly. We note that the acquisition will be accretive next year, taking out two of the items that Ray had mentioned. We think that it provides good value for shareholders, though we do acknowledge that the price is one which has caused us to be quite thoughtful about what we could do with the business going forward. With that, I'll turn it back over to Ray and Mark for additional comments.
Yeah, just really adding on to Linda's answer. In terms of the financial metrics that we have publicly discussed historically, as Linda said, it passes several of those metrics in terms of producing an IRR above Moody's cost of capital comfortably, being GAAP EPS accretive by year three or in 2019. Where it misses modestly is with respect to our 10% annual cash return yield and our cash payback period. It only misses modestly, frankly, we felt for something that is this strong a strategic fit, it was worth stretching a bit.
Thank you.
We'll go next to Craig Huber of Huber Research Partners.
Yes, good morning. I have one question, please. Can you give us in recent years, what's the revenue EBITDA growth rate of this acquisition? You talk about being high growth. Can you please put some numbers around that?
I think Ray covered it in the script. The last 10 years, their compound annual growth rate on the top line has been almost 9.5%. I think it was 9.3%, is the number Ray quoted.
EBITDA, could you just go a little further detail there, please?
Yeah. The EBITDA margin went from 38% to 51% over that same 10-year period.
Is it safe to say, Ray, in the last, say, three years that the revenue growth rate was around that roughly 9.5%, or was it more front-end loaded?
No, it was around that. It's been a very consistent grower. That's one of the real attractions of this business.
Great. Thank you.
We'll go next to Bill Warmington of Wells Fargo.
Good morning, everyone.
Hi, Bill.
In some ways, this is you guys going back to your roots, right? Since originally you spun out from D&B way back in 2000. I think the natural question we're going to get is one about comparing this business, BvD, to D&B. Of course, one of the reasons for doing that is that there's about a two to three multiple discrepancy in terms of how the market values your current business on 2018 EBITDA versus the D&B business. Maybe talk a little bit about the similarities and differences between BvD and D&B.
I'll let Mark address this because he's looked into this a bit more than I have.
Bill, you're correct. At least at a high level, there are some similarities between Dun & Bradstreet and Bureau van Dijk, but there are also some important differences too. First, Bureau van Dijk has a very global orientation. They have data coverage of literally every country on the planet. Dun & Bradstreet's focus is much more in the Americas, and to the extent that they have coverage outside of the Americas, it is quite a bit more limited than is Bureau van Dijk's. Moreover, Dun & Bradstreet focuses principally on the application of its data and its services to the trade credit market, to procurement, and to sales and marketing. Those are the typical use cases for Dun & Bradstreet, and clearly, they have a very substantial franchise in those domains. For Bureau van Dijk, there is a much broader set of use cases.
Bureau van Dijk participates clearly in credit, procurement, sales, and marketing. More importantly, they're very relevant to supporting work that organizations do related to tax risk and transfer pricing. They have an M&A information and news business that is used extensively for corporate finance purposes, particularly again in the private company space. They have a very detailed and specialized financial institutions data set, which is an area that we're very interested in working with them on and achieving broader distribution of that product. They do some very interesting work and have what we believe to be one of the most extensive company ownership structure data sets in the world, and a purpose-built compliance interface to that ownership data set that is very relevant to customers who need to do work around compliance and financial crime kinds of analysis.
There are some very interesting and deep use cases here that make Bureau van Dijk's capabilities relevant to these domain areas that we like a lot because much like the businesses we're in, those are domain areas that we would characterize as sort of need-to-have kinds of information, in the sense that customers are doing work around tax planning and transfer pricing and compliance and financial crime that they absolutely, positively have to do. The Bureau van Dijk platform assists them in getting that work done comprehensively and competently. We really like the way that they build out their capabilities and the way they're targeted on those specific use cases.
It sounds like the margins certainly support that. You're in the low 50s% versus the high 20s% for D&B on the EBITDA side. A couple of housekeeping items as my follow-up. You mentioned the 9% growth. Just was curious how that broke down between units and price increases. Also one for Linda on what the pro forma expected gross and net leverage was at closing.
On the growth rate, I would say that their growth is largely driven by volume. This is not a business that has really pushed customers very hard on price. Because there's so much demand for what they're doing, again, going back to what I was talking about a moment ago in supporting this kind of work that customers have to do with their product, they've really achieved their growth through adding customers and deepening penetration. The other note I should point out, Bill, is that all of the growth that this company has produced over the last decade, that 9% average annual growth rate, 100% organic growth. This is not a company that's grown through acquisition.
Bill, it's Linda. In terms of growth for the corporation, it's very important that everyone on the call realize that, as Ray had said, we had been expecting mid-single-digit top-line growth for Moody's. This acquisition added to Moody's takes us to a high single-digit growth rate. It really turbocharges the growth rate of Moody's. On the leverage front, Bill, we would expect to return to leverage levels that we had previously held in about 18 to 24 months. Given the strong cash flow of both businesses, we feel that we can de-lever pretty quickly, and then as I said before, we'll take a look at where we go with share repurchase following that de-leveraging. Does that get it done for you?
Yes, it does. Thank you very much.
Sure.
We'll go next to Tim McHugh of William Blair.
Good morning. This is actually Trevor Romeo in for Tim today. Just from a competitive standpoint, are there any competitors to BvD that have kind of a similar size and scale of data? How do you view the differentiation of the data product?
Well, in terms of competitors, we haven't found another company with Bureau van Dijk's data network scale insights. It's a very unique asset in that respect. Mark, I don't know if you wanted to comment on the other. No, that's absolutely correct, Ray. For customers that have needs across multiple jurisdictions, multiple countries, certainly customers that are doing business globally or across multiple countries or multiple regions, the Bureau van Dijk solution is very powerful. There are some kind of country-specific or specific solutions available in the market if you've got needs in a specific country. When you're doing business in a cross-border environment, Bureau van Dijk is the platform of choice.
Okay, great. Thank you. Just one more quick one. Given that BvD was owned by a few different PE firms previously, do you see any risk that the profit margins might be at unsustainably high levels?
Well, we are certainly going to invest in the business. It's going to help us realize our synergies. It's now a part of a large public company, we are going to make sure that its standards and operations are consistent with our own obligations as a public reporting company. That being said, we have built into our models and our outlook for the business these investments, so the numbers that we've been talking to you about are consistent with all of those future investments that we're putting into Bureau van Dijk. Yeah, exactly. Those are net synergies that we've been talking about, net of whatever investments we need to make.
Right. Okay, great. Thank you very much for the color.
We'll go next to Alex Kramm of UBS.
Oh, hey. Just figured I'd jump on for some follow-ups. Linda, actually, I don't think you've mentioned this, some of the financial numbers here, I guess, for the company. What's the D&A for the acquired company? What's the tax rate they got? What's the interest expense that you're assuming? Maybe the amortization expense for the deal, if you have those numbers handy.
Sure, Alex. We're not going to go into all that detail on this call. On the tax rate, we would note that the addition of BvD will average down Moody's tax rate. We have been guiding to about 30% tax rate. We'll have more information on all of those numbers as we get into the second quarter earnings call. We'll provide you with additional color at that time.
Alex, I would just add that because the timing for closing the transaction is subject to regulatory approvals, that creates some certainty for the 2017 numbers. We will have to update you when we get to the second quarter earnings call. Hopefully by then have a better idea of what the timing looks like.
All right, very good. Thank you.
We'll go next to Vincent Hung of Autonomous.
Hi. Can you touch upon the main customer use cases for the BvD data?
Sure. It's Mark here. In kind of order of importance, I guess, from the standpoint of how we look at the business, clearly, the Bureau van Dijk is used to assist customers with work in credit analysis. If you're lending to private companies around the world, using Bureau van Dijk's platform is enormously relevant. There's credit analysis as a use case. Investment research generally. The Bureau van Dijk platform is used quite extensively by private equity firms in doing their work and their valuation analyses. There are applications of Bureau van Dijk, and I touched on some of these earlier, around tax risk and tax planning, transfer pricing, other corporate finance matters. I mentioned the detailed dataset that they've got on global financial institutions, applications of their information to procurement, sales, and marketing information. This is a product that is used
Quite extensively for know your customer kinds of requirements, when you're doing customer onboarding and you're checking to make sure that people you're working with aren't subject to any kind of sanctions or other issues around compliance or financial crime. The Bureau van Dijk data set is quite relevant there as well.
Okay. On slide 11, you have the four synergy drivers there. Can you rank or quantify the contribution of each one?
I'm not sure we can really go into that level of detail today, suffice to say, we've got a lot of focus on the top line growth synergies. I would say the immediate opportunities for us to cross-sell our products to their customers, particularly outside of financial institutions, excuse me, and selling their products more deeply to our customers. Those are very interesting and attractive to us. There are also some important product development opportunities that we have, that once the transaction closes, we're going to start work in providing some of our information to their platforms and vice versa.
Thank you.
We'll go next to Craig Huber of Huber Research Partners.
Yes, I was just wondering what % of the revenues come from the U.S., please?
It's relatively low, Craig. Their core market is Europe. They've done a terrific job in Europe. About 75% of their revenue comes out of Europe. The remaining 25% is pretty evenly split between the Americas and Asia Pacific. That's another very important area of synergy that we see, given our brand, our global reach, our distribution capabilities. You may recall that Moody's Analytics has quite substantial distribution, of course, in the Americas and also in Asia. Being able to take that product to our customers in those parts of the world is an important synergy that we will pursue.
Great. Thank you.
We have no further questions. I would like to turn the call back over to Ray McDaniel for closing remarks.
Okay. I want to thank everyone for joining today's call on short notice. As I hope you can tell, we're very excited about the opportunities we see in our acquisition of Bureau van Dijk, and we look forward to updating you on our progress over the coming months. Thanks again for joining.
This concludes the Moody's acquisition of Bureau van Dijk conference call. A copy of this presentation is available on Moody's IR website. Thank you.