As Reuters' share price sank to 148p during trading on Thursday, its expected 2003 earnings were valued at well under 10 times, a hefty discount to the market. Investors are just not prepared to credit Tom Glocer's promise that he can bring the information group out the other side of the current downturn with its earnings back on a growth path. The only thing that might put a floor under it is a bid for the company from a third party that believes future earnings really can grow. Is such a deus ex machina out there?
Reuters' two rivals, Bloomberg and Thomson, are most unlikely to help, even though they are, by definition, committed to managing an information business through a downturn. Taking out Reuters would offer them big synergies, not to mention the competitive benefits of consolidation. And Reuters insiders have suggested that the Founder's Share, which allows the group's supervising Trust to block a merger in order to protect editorial independence, would not be a fatal obstacle to a deal. The trouble is, there seems no way a takeover by one of those rivals could get antitrust clearance.
What about private equity? In theory, a public-to-private buy-out looks doable. Lenders will usually provide up to 3 times the target's ebitda as debt finance. Say Reuters sank to 148p again. At that price, three times expected 2003 ebitda, or around £1.8bn, would come to three-quarters of Reuters' enterprise value. That suggests there would be scope to put a typical leveraged structure in place, and have room for a bid premium.
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But private equity faces three important barriers. First, a bidder would have to overcome the same visibility worries as today's shareholders. Second, and more seriously, those uncertainties would erode banks' willingness to contribute debt. And the third problem appears a killer: there is no real reason to think a private equity bidder could bring any better solutions to the business than its current management already has.
That leaves just one potential bidder to put a floor under Reuters' shares: current management itself. If Tom Glocer is still in his job as chief executive, it can only be because he really believes his restructuring can deliver future earnings growth. If his share price slips again, taking his business off his shareholders' hands would be a matter of mere logical consistency. He just needs to persuade private equity backers to trust him where his shareholders don't. That can't be so hard – can it?
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