S&P/IHS Markit: OPIS Faces Spin-Off; Cappitech Beefs Up Regtech Frontline

As S&P Global Market Intelligence sets out to acquire IHS Markit by the second half of this year, some analysts, including those advising on the deal, say S&P will need to divest itself of OPIS, IHS Markit’s energy and commodities pricing business, to satisfy anti-trust laws.

The proposed deal would bring together several complementary businesses, including combining S&P’s equities index unit with IHS Markit’s fixed-income index offering; and S&P’s artificial intelligence (AI) research platform, Kensho, with IHS Markit’s Data Lake. While much of the two companies’ product lines are largely complementary and have little overlap, sources say one exception is S&P Platts and IHS Markit’s Oil Price Information Service (OPIS). Both of these services offer pricing information for many of the same products, including gas, oil, coal, chemicals, and renewables.

One analyst at a Tier 1 US bank who is familiar with the inner workings of the deal, says OPIS is an obvious candidate to be sold off to avoid regulatory problems or delays in closing the deal.

“I think for regulatory or antitrust reasons, they’re likely to have to sell OPIS, [which sits] within the Resources business of IHS, because it would just give them too much market position if you put that together with the Platts business at S&P,” says the analyst, who requested anonymity because of how close they are to the two companies.

During IHS Markit’s fourth quarter 2020 earnings call on January 13, Jefferies analyst Hamzah Mazari asked if the firm expects to divest itself of any business, or if there are any reasons the deal may be delayed. IHS chairman and CEO Lance Uggla responded that the firm is working to address any hurdles and business overlaps between the Platts and OPIS businesses.

“All the hurdles that we knew going into it, in terms of the business overlap within our Platts and OPIS businesses, are there, and the teams are working to address those. My view is there shouldn’t be any significant roadblocks or hurdles; we would expect to close in the second half [of 2021] and expect the teams to work with the regulatory bodies to determine the precise nature of the overlap with any assets, which are substantive, [but are] insignificant in terms of size across the transaction,” Uggla said.

A spokesperson for S&P Global declined to comment for this story. A spokesperson for IHS Markit said the company did not wish to comment on speculation. “From our side, we are not going to comment on anything until we have spoken to the regulator,” they add.

One reason that attention has turned to Platts and OPIS is that the commodities space is dominated by an elite few.

The IHS/S&P deal “comes into real focus because there’s a limited number of providers in that market,” says Virginie O’Shea, CEO and founder of Firebrand Research. “In terms of commodity pricing, you do not have a huge number of players in that space.”

Platts is the market leader in energy and commodities benchmark pricing globally, according to the bank analyst. Argus Media, a London-headquartered private equity company, and OPIS come in second and third, respectively, in terms of commodities coverage and market share in the space, says the source.

S&P’s latest 2019 annual figures show revenues of $850 million, and the company is expected to pull in similar returns for 2020, according to S&P’s quarterly reports. Cited in its 2020 fourth-quarter earnings, IHS Markit’s Resources business stream, which includes OPIS, pulled in annual returns of $863 million in 2020, down circa 8% on total revenue from 2019.

“It strikes me and a lot of market participants I’ve talked to—and certainly there are some press reports on it—that putting one and three (in terms of market leaders) together is probably something that could raise some concern,” the analyst says.

Other, smaller players in this space include Metal Bulletin, a London-based provider of metal and steel pricing information, and Commodity Market Analysis, which offers data on mining, metals, and fertilizers.

While the deal is expected to close later this year, in the coming months, regulators will scrutinize the dominance of a possible Platts–OPIS merger, or whether the two companies could grow to a point where they would monopolize energy and commodities pricing.

The head of market development at a Europe-based exchange, says that more broadly, many users of financial data will look at this deal with some trepidation. The concern is that the dominant few are becoming more dominant. As big players like S&P or the London Stock Exchange Group, with its acquisition of Refinitiv, buy up more and more data businesses, banks are being forced to accept the growing fees of a diminishing number of providers.

“Now you are seeing this level of consolidation, which in some ways is going to give these guys even more negotiation clout,” the exchange executive says.

As one market data manager at a European asset manager told WatersTechnology just after the S&P/IHS deal was announced, “M&A in this industry is rarely beneficial for customers. The most welcome ones are … where there is not much crossover, such as a data company buying a technology provider. But when one fish swallows another, it just creates more dominance and less end value for clients.”

But there is an important difference between the Bloombergs or the LSEGs of the world, says the exchange executive, as S&P and IHS Markit’s index information and Price Reporting Agency (PRA) data are embedded into products or contracts, where there is less optionality in the market to source those kinds of datasets. PRAs are privately owned publishers or information providers that report prices on the physical commodities markets, including oil, metal, and chemicals prices.

“The irony is that Markit was started by a bunch of banks, or a bank consortium, and as is so often the case, they ended up spinning it off. IHS Markit is going to come back in a new form and squeeze money out of the very banks that started the company in the first place,” the source says.

Cappitech/IHS Markit: The Consolidation Continues

Even as S&P and IHS Markit prepare to present their case to regulators, the deal-making has not stopped.

On January 11, IHS Markit made a bid to bolster its regulatory reporting businesses by acquiring Tel Aviv-based regtech firm Cappitech. Prior to the announcement, the two firms already had an existing relationship, as IHS Markit selected Cappitech’s Cappitivate platform as a key component of its Securities Financing Transaction Regulation (SFTR) solution in 2019.

Cappitech CEO Ronen Kertis and Pierre Khemdoudi, global head of equities at IHS Markit, say it is still too early to tell how the technologies will be integrated, and which systems will be picked to support the regulatory reporting services, but initial integration has already begun. Kertis adds that because the two firms have experience with integrating their SFTR solutions, they already have a common understanding of each other’s technologies.

Kertis will transition to the role of head of regulatory reporting at IHS Markit, overseeing the combined businesses and reporting to Khemdoudi. The objective for the acquisition is to integrate and build out the existing services in the future, Kertis says. He adds that there is no intention to cut staff because of the deal.

The latest acquisition highlights the continued consolidation in the regulatory reporting space. Last year saw market operator MarketAxess acquire Deutsche Börse’s reporting arm in September, and the Chicago Mercantile Exchange (CME) unwind several reporting units on November 30, 2020. Regulatory reporting is an area in which Khemdoudi and Kertis believe IHS Markit can grow its footprint and become dominant. They see an opportunity for growth because of the complexity and constantly changing regulatory landscape—including new and upcoming rules such as SFTR, which went live in April 2020, and the reviews of the latest Markets in Financial Instruments Directive (Mifid II) and the Markets in Financial Instruments Regulation (Mifir).

“We see the regtech space growing at a fast pace, and we see a lot of interest coming from the buy side, the sell side, larger organizations, and so on,” Khemdoudi says. “We expect that trend to keep growing over the next few years, as we see that regulations are becoming more and more complex, and all our clients are telling us there is a need for a frictionless, accurate, and cost-effective solution that will help them to tackle those very complex regulatory reporting challenges.”

Kertis says Cappitech won 50 group-level clients from the CME following the exchange’s rollback last year. He adds, however, that within those 50 group-level clients, that there are multiple legal entities that it services. 

As result of the acquisition, IHS Markit will absorb Cappitech’s 200 group-level clients. These clients are large companies that include multiple global legal entities or subsidiaries.

“Working with a firm like IHS Markit is a great opportunity to have access to a wider client base, to be able to grow the business, and further enhance the products,” Kertis says.

Another player, MarketAxess, has taken significant strides to extend its position as a leader in regulatory reporting. In its takeover of Deutsche Börse’s reporting businesses, it acquired the exchange’s entire log of 500-plus reporting clients. In August 2019, Bloomberg also acquired RegTek Solutions to extend its services and reach to more jurisdictions for European Market Infrastructure Regulation, Dodd–Frank Act, and Monetary Authority of Singapore reporting needs.

Khemdoudi says the S&P acquisition was enacted independently of the IHS Markit purchase of Cappitech. The Cappitech deal closed on December 31 and there are no outstanding regulatory or shareholder approvals.