Valuation in B2B Information Services: The view from the top (Part 1)
Whilst (occasional political dislocations aside) equity markets have settled into their seasonal lull, the onset of summer 2017 was marked by our index of quoted B2B information services companies breaking the 230 barrier for the first time. Starting from a base of 100 in August 2007 this put the sector on a ten-year valuation high in both absolute pound or dollar terms and as a multiple of earnings. Valuation multiples across the market now exceed 16x (EV/EBITDA), more than double the cyclical low of 2008/9.
The varying mix of earnings and valuation multiple growth (or contraction) that has driven this new high for our sample paints a revealing picture of the changes that the B2B information services sector has undergone over the economic cycle.
The strongest growth in value came from two verticals, financial markets data and credit & risk information. In both groups earnings have not just rebounded from their recessionary low, but delivered meaningful growth relative to the 2007 high-water mark, a testament to the structural growth of data sets and data usage enabled by technology across a range of markets. Whilst the value appreciation of financial data businesses relative to 2007 levels was driven almost entirely by earnings growth with little change in valuation ratings, the credit & risk vertical has enjoyed a meaningful uplift in valuation multiples which now sit at 15.9x, 20% above their 2007 levels.
All the financial data business models in our sample performed strongly, delivering average earnings growth of 160% (a CAGR of c.10% over the decade) and enjoying corresponding value growth. Amongst these, MSCI is the standout performer having flourished since its divestment from Morgan Stanley due in large part to the growth of passive investing strategies.
Credit & Risk
Fortunes of credit & risk information providers have been more mixed. At the front of the pack, FICO has successfully extended its franchise beyond credit scoring to encompass a range of analytical and workflow tools used in credit and other consumer-facing applications, with the result that both its earnings and valuation multiple have approximately doubled since 2007, quadrupling equity value.
By contrast, D&B has spent much of the past decade in a process of retrenchment from international markets and operational restructuring. Whilst its 2015 acquisition of Credibility may provide the basis for renewed growth, D&B today is valued 9% below its 2007 level at 12.4x EBITDA.
Marketing & Other
Our marketing & other data group grew almost as strongly as the first two, and for much of the decade had been the highest performer. Both Neilsen and Alliance Data have benefited from the growth of data-driven 'performance' marketing. Alliance Data, through its astute acquisition of Epsilon, has performed particularly strongly growing both it earnings (+180%), and its valuation rating which expanded 60% from its 2007 level to reach 22.7x EBITDA.
For professional information providers the last decade has been one of relative stability. Although digital has required operational change it has not fundamentally disrupted B2B professional information in that way that it has impacted many B2C publishers. Most providers have been able to take advantage of the revenue and cost opportunities that digital presents to grow earnings; as a group profitability today is c.50% above its 2007 level. This combined with a modest expansion of valuation multiples (to an average of 15.5x) has delivered solid growth in value.
Amongst the professional group RELX and Euromoney enjoyed the strongest value appreciation since 2007, which in both cases was driven primarily by very substantial earnings growth. By contrast Informa and Wilmington weathered the recession unscathed, delivering 2017 earnings broadly in line with their 2007 level, but in consequence enjoyed neither multiple expansion nor value growth.
In the M&A market we see the impact of elevated public valuations in the B2B information services market; good quality assets command premium prices and despite economic uncertainty activity continues. Despite healthy M&A pricing, quoted companies of scale are still able to buy high-performing assets at meaningful discounts to their own valuations.
Naturally, all-time high market values lead one to ask where the next phase of growth will come from, or whether current valuations in B2B information services are sustainable. In Part II of this series we will examine the drivers of growth in more detail and look at how today's market valuations compare historically when the evolution of business models is considered.
Note: 1) Alliance Data, CoreLogic, D&B, FactSet Research, Equifax, Euromoney, Experian, Fair Isaac, IHS Markit, Informa, Morningstar, MSCI, Nielsen Holdings, RELX, S&P Global, Thomson Reuters, TransUnion, Verisk Analytics, Wilmington.