By Pamela Barbaglia and Jessica Toonkel
LONDON/NEW YORK (Reuters) - U.S. private equity firm Blackstone Group LP catapulted itself into the major leagues of Wall Street's financial information industry on Tuesday with the acquisition of a majority stake in the Financial and Risk business of Thomson Reuters Corp.
The $20 billion deal is Blackstone's biggest bet since the financial crisis and pits co-founder Stephen Schwarzman against fellow billionaire and former New York Mayor Michael Bloomberg. Bloomberg's eponymous terminals are the market leader in providing traders, bankers and investors with news, data and analytics.
Blackstone will acquire a 55 percent stake in a newly hived off F&R business, a statement from both companies said. Thomson Reuters will retain a 45 percent holding and will receive approximately $17 billion, including about $3 billion in cash and $14 billion of debt and preferred equity issued by the new business, the companies said.
The deal will give Thomson Reuters, controlled by Canada's Thomson family, a formidable ally as it seeks to reinvigorate a business facing challenges from a shrinking and budget-conscious customer base.
Blackstone has a track record of cutting costs and, as one of the world's biggest investors, it has business relationships with most of the major banks on Wall Street that are clients for Thomson Reuters' flagship desktop product Eikon.
The Canada Pension Plan Investment Board and Singapore's GIC will invest alongside Blackstone. The amount they will provide was not revealed. The Canada Pension Plan Investment Board declined to comment. A spokeswoman for GIC declined to comment.
Talks on a possible deal began in earnest last summer, two sources familiar with the negotiations said.
The partnership will be managed by a 10-person board composed of five representatives from Blackstone and four from Thomson Reuters. The President and CEO of the new partnership will serve as a non-voting member of the board following the closing of the transaction. The companies did not say who that person would be.
Thomson Reuters has relied heavily on cost cutting in recent years as its core customers, including banks, brokerages and investment houses, retrench in the face of weak trading conditions, tougher regulations and the rise of passive investing.
U.S.-listed shares of Thomson Reuters were up 2.2 percent at $47.52 in extended trading, after rising 7.1 percent in the regular session, while shares of Blackstone were down 0.2 percent after the bell.
As talks between the two sides intensified, the biggest sticking point had been what the partnership would mean for Reuters News, the international news agency, which supplies the Eikon terminal with headlines, stories and analysis, said the two sources, who spoke on condition of anonymity.
One issue centered around the Thomson Reuters Trust Principles, which commits Reuters to preserving its "independence, integrity, and freedom from bias" in supplying news.
In an interview, Kim Williams, chairman of the Thomson Reuters Founders Share Company, said "we are satisfied that the nature of the contract ensures that appropriate quality of editorial is sustained."
In its statement, Thomson Reuters and the Thomson Reuters Founders Share Co, which has overseen Reuters' editorial independence since the company was first publicly listed in the 1980s, cited "consequential modifications" to what it described as the Trust Principles "arrangements." The changes were not spelled out.
Until now, the principles have applied not just to Reuters News but to all Thomson Reuters business units.
Thomson Reuters Chief Executive Jim Smith said in an interview that the partnership with Blackstone required clarifying where the Trust Principles apply.
Under the deal with Blackstone, "The Trust Principles apply any place where we use the Reuters brand or a third party uses the Reuters brand in a product," Smith said.
Reuters News will remain part of Thomson Reuters, along with its Legal and Tax and Accounting divisions. The new F&R company will make minimum annual payments of $325 million to Reuters over 30 years to secure access to its news service, equating to almost $10 billion. The payments will be adjusted for inflation, company executives said.
Thomson Reuters Chief Financial Officer Stephane Bello told an investor call that the payment represented what F&R used to allocate to Reuters News, plus "a tiny bit more".
After the deal, Reuters News will have about $625 million in revenues, including the annual payment from F&R and about $300 million in revenues from its media business, slightly higher than its cost base, Bello said.
Williams said that an advantage of the deal was that Reuters will move "from being a cost center inside Thomson Reuters to being a full operating business unit with its own profit and loss accounts."
Thomson Reuters expects the transaction to close in the second half of 2018. The company said on Tuesday it expected 2017 results, which it will release next month, to meet or exceed guidance, with revenues expected to rise by 1 percent.
The proceeds of $17 billion that Thomson Reuters will glean from the deal match the amount that Thomson Corp, controlled by the Thomson family, paid for London-based Reuters in 2008. That deal created the Thomson Reuters Group.
The company plans to use $9 billion to $10 billion to buy back shares, and use the rest to pay down debt, invest in its Legal and Tax & Accounting units and make selective acquisitions.
Woodbridge, the Thomson family's investment company, will take part in the share repurchase, maintaining its ownership in Thomson Reuters in the 50 to 60 percent range. Woodbridge, which currently owns 64 pct of Thomson Reuters, could not immediately be reached to comment on the deal.
Over the past six years, the family has been making divestments, reducing the number of products within the F&R segment by about 70 percent since 2012, while shrinking the division's workforce by 25 percent, according to Morningstar Equity Research. Thomson Reuters Chief Executive Smith told an investor call that there was room for more cost cuts in the new F&R business.
Thomson Reuters has also sought to sell non-core assets, such as its intellectual property and science business, which it sold to private equity firms Onex Corp and Baring Private Equity Asia for $3.55 billion in 2016.
(Reporting by Pamela Barbaglia, Jessica Toonkel and Greg Roumeliotis; Writing by Carmel Crimmins; editing by Grant McCool)