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Sterman points out that another dip in the economy could cause lenders to pull back on their lending to TRI, and that would put a strain on TRI's weak balance sheet:
Right now, Thomson Reuters carries a hefty, but manageable, $7.5 billion in debt. This shouldn't be a problem, as noted by EBIT coverage of about 8 (which means Thomson Reuters' quarterly cash flow is eight times higher than its interest payments). But what if the economy stumbles and demand for the company's professional-grade subscription services starts to slump? EBIT coverage would quickly shrink, forcing the company to meet with lenders to make sure Thomson Reuters doesn't run out of cash. This scenario is quite unlikely in the next quarter or two, but bears close scrutiny in a worsening economic environment.The rumblings of potential problems in the mega-media firm became apparent back in July when CEO Tom Glocer was told by the Thomson family that TRI needed a further restructuring plan than the one Glocer implemented this Summer.
Why is Thomson Reuters being listed as a company in trouble? It's a reason that many of you will rejoice in hearing — Competition.
Initially, the competition was coming from the financial side of the TRI universe. Smaller companies like Morningstar, and FactSet, as well as established companies like Bloomberg are keeping TRI's major financial platform, Eikon, from hitting expectations. Smaller companies are just not seeing the value behind the high-priced platform offered by TRI.
Now, think about TRI's well established legal division (as well as mega-profitable.) If the Bloomberg/BNA merger proves to be actual competition and starts cutting market share… then Sterman's scenario suddenly looks very possible. The boom-times of the consolidation within the publishing industry may be suddenly looking very much like a "bubble" for TRI if the competition (which also gobbled up smaller fish in the publishing market – see Jean O'Grady's merger post) can start moving TRI customers over to its products.
For investors, Sterman suggests that it is time to "consider selling them now, because all of them [TRI included] could tumble in a hurry." As for those of us who are customers of TRI, it might be time to look at how stable a product they really are, and start looking at what potential alternatives are available to the TRI stable of products.