Good day, and 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 Sallie Schwartz, Global Head of Investor Relations and Communications. Please go ahead.
Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's acquisition of Buro Van Dijk, which we announced earlier this morning. I am Sallie 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 ks for the year ended December 31, 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, Sally. Good morning and thank you to everyone for joining today's call. Earlier this morning, we announced that Moody's entered into a definitive agreement to acquire Buro Van Dijk or BVD, a global provider of company information and business intelligence for €3,000,000,000 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 insight. BVD aggregates, standardizes and distributes one of the world's most extensive private company data 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 2,006, 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.
BBD consistently achieves renewal rates that exceed 90%, reflecting the high quality of the company's products. On top of BBD's very attractive standalone financial performance, we expect to realize approximately $45,000,000 in annual revenue and expense synergies by 2019, with those synergies growing to approximately $80,000,000 by 2021. As we execute on these plans, BBD'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 percent from the previous mid to high single digit percent and EPS growth accelerates to the low teens percent from the previous high single digit to low double digit percent. Notably, we will use approximately $1,300,000,000 of offshore cash to fund this acquisition, with the remainder funded by approximately $2,000,000,000 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 2 20,000,000 private companies around the world. This represents a very substantial set of unique information.
2nd, 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. 3rd, BVD has long established relationships with more than 160 third party information providers. 4th, 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, BBD is a very strong business that complements our existing offerings and provides us many exciting expansion opportunities. So now let me turn this over to Mark. Thanks. As Ray just mentioned, Euro Van Dijk maintains an impressive collection of data elements on 100 of millions of private companies sourced through its diverse global network of information providers.
BBD's value proposition flows from, 1st, 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 BBD 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, Euro 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 BBD'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 long standing 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 BBD'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. And 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 Q3 of this year. 2nd, we will take several steps to fund the €3,000,000,000 purchase price. Importantly, we will use $1,300,000,000 of our $1,900,000,000 of offshore cash holdings to fund this transaction.
At signing, we have $1,500,000,000 of committed financing in the form of a bridge loan. Between signing and closing, we will issue approximately $2,000,000,000 of debt, including approximately $500,000,000 of commercial paper, a $500,000,000 term loan and $1,000,000,000 of new long term bonds. Regarding share repurchase, we expect to reduce our 2017 2018 share repurchase programs to approximately $200,000,000 in each year. In 2019, we will give further guidance regarding share repurchase. Once we have completed our deleveraging following this transaction, we expect to return to share repurchase more in line with our historical practices.
And lastly, regarding dividends, we anticipate maintaining our current dividend policy of approximately 25% to 30% payout of net income. Before we move to Q and A, I'd like to reemphasize what we've been able to accomplish with this transaction. As Mark noted, BBD 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. And 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 onetime 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. And this concludes our prepared remarks. We'd be pleased to take any questions you might have.
Thank you. Our first question comes from Warren Gardiner of Evercore.
Hey, good morning guys. So just a quick question on the revenue and or on the revenue and synergy or in cost synergies of the $80,000,000 can you just give us a rough breakdown, cost versus revenue?
Sure. It's as we've talked about, it is a combination of both revenue and cost synergies. By 2021, that $80,000,000 synergy target should be roughly split equally between revenue and expense.
Got it. Okay. And then 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.
Okay. Thank you.
We'll go next to Alex Kramm of UBS.
Yes. Hey, good morning, everyone. Yes, 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 said I think generally that business is acknowledged as one of the best businesses in the world.
So the bar has always been very high to diversify. So why what's the portfolio rationale for this acquisition, I guess, is the question. I understand it's a great business, but ad analytics often has been viewed as a detractor of the story. It's been slowing this year and now you're kind of doubling down on that. So 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 information, financial information, presented in a globally consistent manner is something that we have done for decades decades with respect to public companies, and has been the essential heart of our RDNA research RDNA 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. Yes.
I mean, first, Alex, I'll do my best not to take it personally that you referred to me as a distraction. But no, 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. So 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. But we found a very unique asset here and we look forward to doing a lot with it. Yes.
I'd just add on that, I mean, 2 things, I think, really. First of all, this is also a resource that's going to be available to Moody's Investor 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.
So it is a resource to both Moody's Analytics, obviously, but it's also a resource to Moody's Investor Service. And 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. Thanks. Thank you. And then just a quick one on the, I guess, the accretion math. 1, 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. So just want to make sure that that's how you're really factoring the opportunity cost. And then is the accounting switching? Are you going to back out intangible amortization going forward? Thank you.
Sure. Alex, it's Linda. We have modeled this using the new assumption of $200,000,000 of share repurchase in both 2018 2019. We have considered the opportunity cost of repurchasing shares and we feel that this acquisition is positive to Moody's shareholders and 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 and share repurchase, but 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. And 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 Q2 earnings call.
Thank you very much.
Sure. We'll go next to Joseph Foresi 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?
Yes. We've known the company quite well for a long time. And we always thought it's a very attractive business. As a matter of fact, we are a customer of the company. And I think in terms of were we the only bidder, early on, Moody's and the Bureau Van Dyke 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 had done so in this case.
Okay. And then 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 and 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. And we've looked at on a number of valuation metrics. It meets or exceeds most of those acquisition criteria And on others, it misses, but just barely, just modestly.
We note that the acquisition will be accretive next year taking out 2 of the items that Ray had mentioned. So we think that it provides good value for shareholders though we do acknowledge that the price is 1, which has caused us to be quite thoughtful about what we can do with the business going forward. And with that, I'll turn it back over to Ray and Mark for additional comments.
Yes. 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 and being GAAP EPS accretive by year 3 or in 2019. Where it misses modestly is with respect to our 10% annual cash return yield and our cash payback period. But it only misses modestly and frankly we felt 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. You give us in recent years what's the revenue EBITDA growth rate of this acquisition? You talked about being high growth.
Can you please put some numbers around that?
I think Ray covered it in the script. 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.
And EBITDA, can you just go a little further detail there, please?
Yes. The EBITDA went from the EBITDA margin went from 38% to 51% over that same 10 year period.
Is it safe to say, Ray, in the last, say, 3 years, 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 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. So in some ways, this is you guys going back to your roots, right, originally you spun out from D and B way back in 2000. So I think the natural question we're going to get is one about comparing this business, BVD, to D and B. And of course, one of the reasons we're doing that is that there's about a 2 to 3 multiple discrepancy in terms of how the market values your current business on 2018 EBITDA versus the DNB business.
And maybe talk a little bit about the similarities and differences between BVD and DNB?
Yes. I'll let Mark address this because he's looked into this a bit more than I have. Bill, you're correct. There are some at least at a high level, there are some similarities between Dun and Bradstreet and Bureau Van Dijk. But there are also some important differences too.
I mean, first Bureau Van Dijk has a very global orientation. They have data coverage of literally every country on the planet. Dun and 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 Dyke's. Moreover, Dun and 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 and 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. But more importantly, they are very relevant to supporting work that organizations do related to tax risk and transfer pricing.
They have an M and 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. And they do some very interesting work and have what we believe to be one of the most extensive company ownership structured 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. So, 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. And the Bureau Van Dijk platform assists them in getting that work done comprehensively and competently.
So we really like the way that they build out their capabilities and the way they're targeted on those specific use cases.
Yes. Well, it sounds like the margins certainly support that. You're at net low in the low 50s versus the high 20s for DNB on the EBITDA side. So well, a couple of couple of housekeeping items as my follow-up. You mentioned the 9% growth.
Just curious how that broke down between units and price increases. And then also one for Linda on the what the pro form a expected gross and net leverage was at closing?
Yes. 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, very hard on price. This is 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 these 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. So this is not a company that's grown through acquisition.
And 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. So 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.
So given the strong cash flow of both businesses, we feel that we can delever pretty quickly. And then as I said before, we'll take a look at where we go with share repurchase following that deleveraging. 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? And 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. And Mark, I don't know if you wanted to comment on the other. No, that's absolutely correct, Ray. I mean, 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. But when you have when you're doing business in a cross border environment, Bureau Van Dijk is the platform of choice.
Okay, great. Thank you. And then 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 unsustainably high levels?
Well, we are certainly going to invest in the business. It's going to help us realize our synergies. And it's now a part of a large public company and 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. And 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.
Yes, 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.
Hey, just figured I'd jump on for some follow ups. Linda, can you actually, I don't think you've mentioned this, some of the financial numbers here, I guess, what's the company like? What's the D and A for the acquired company? What's the tax rate they got? What's the interest expense that you're assuming?
And 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 BBD 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 Q2 earnings call and we'll provide you with additional color at that time.
And 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. And so we will have to update you when we get to the Q2 earnings call and 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. So 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 analysis.
And then 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 data set that they've got on Global Financial Institutions and then applications of their information to procurement, sales and marketing information. This is a product that is used quite extensively for know your customer 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 dataset is quite relevant there as well.
Okay. And on Slide 11, you have the 4 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, but suffice to say we've got a lot of focus on the top line growth synergies. So I would say the immediate opportunities for us to cross sell our products to their customers, particularly outside of financial institutions 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. Thanks.
We'll go next to Craig Huber of Huber Research Partners.
Yes. Hi. I was just wondering what percent 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. And the remaining 25% is pretty evenly split between the Americas and Asia Pacific.
So 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 in of course in the Americas and also in Asia. So 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.
And 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. So 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.