Chicago-based provider of investment research, data and analytics, Morningstar (MORN), recently announced that it has purchased 40 year old credit ratings agency DBRS for close to $669 million. This acquisition expands Morningstar’s existing credit ratings business.
On May 29th, Morningstar entered into a definitive agreement to acquire DBRS, the world’s fourth largest credit ratings agency for a purchase price of $669 million. The combination of DBRS with Morningstar’s existing credit ratings operation will expand the combined firm’s geographical and asset class coverage, as well as provide enhanced fixed-income research capabilities.
Morningstar’s Chief Executive Officer Kunal Kapoor explained the acquisition, “The chance to empower investors with the independent research and opinions they need across a multitude of securities first drove our decision to enter the credit ratings business. DBRS and Morningstar share research-centric cultures committed to rigor and independence. Together, we believe we can elevate the industry with the world’s first fintech ratings agency backed by state-of-the-art models, modern technology, and expert research teams that issuers and investors can count on to deliver transparent and independent ratings.”
“DBRS’s more than 40 years of experience and success coupled with Morningstar’s proven capabilities will offer an even stronger global alternative to larger ratings agencies,” said DBRS Chief Executive Officer Stephen Joynt. “Both DBRS and Morningstar are driven by similar core values that aim to bring more clarity, diversity, transparency, and responsiveness to the ratings process, which makes Morningstar a perfect fit for us.”
Morningstar intends to fund the transaction with a mix of cash and debt. The transaction is expected to be accretive to net income per share in the first fiscal year after completion with an estimated closing in the third quarter of 2019, subject to regulatory approval and customary closing conditions.
Founded in 1976, DBRS has built strong reputation throughout Europe, the U.S., and Canada, with offices in Toronto, New York, Chicago, London, Frankfurt and Madrid. DBRS rates more than 2,400 issuer families and nearly 50,000 securities worldwide. The firm has more than 500 people spread across seven locations and will continue to be led by its existing management team. In 2014 DBRS was acquired by the Carlyle Group and Warburg Pincus. DBRS reported $167 million USD in revenue for the fiscal year ended November 30, 2018.
Morningstar’s acquisition of DBRS makes strategic sense for the firm as it enables Morningstar to quickly ramp up its existing credit ratings business transforming it from a boutique player into a more substantial global ratings agency. The purchase also seems to make financial sense for Morningstar as the price of the $669 mln represents a 4 x multiple of 2018 revenues – slightly cheaper than the 4.9 x average revenue multiple seen for some of the largest public research providers in the 1st Qtr 2019, and significantly less expensive than the 8.8 – 9.0 x revenue multiples seen for S&P Global and Moody’s during the first quarter of the year — two of the world’s largest ratings agencies.
Morningstar first began in the ratings business in 2009 producing non-NRSRO company ratings. In 2010 it acquired Realpoint, an NRSRO with a specialty in commercial mortgage-backed securities (CMBS); in 2016 it acquired InvestSoft, a fixed-income analytics provider; and later that year Morningstar received NRSRO status to rate debt of companies and financial institutions. Since 2010, Morningstar has expanded its credit rating activities to include residential mortgage-backed securities (RMBS), agency risk transfers, single-family rentals, asset-backed securities (ABS), collateralized loan obligations (CLOs), corporate securities, financial institutions and real estate investment trusts (REITs).
During the 1st Qtr 2019, Morningstar’s credit ratings revenue grew 26.7% resulting from 50 new issue ratings primarily in structured finance securities. During that three month period, Morningstar’s credit ratings business generated $9.5 mln in revenue – representing 3.7% of the firm’s overall revenue. If Morningstar had owned DBRS as of Dec. 31, 2018, combined revenue from credit ratings would have represented approximately 17% of Morningstar’s total revenue, with about 50% of the division’s revenue coming from Canada and Europe.
Despite the acquisition of DBRS, Morningstar still has a lot of work to do if it plans to catch up with “the big three” ratings agencies – S&P Global, Moody’s Investors Service, and Fitch Ratings. According to the SEC, these three firms represented 95.8% of all outstanding US ratings at the end of 2017.