Monday, July 23, 2007

Scholastic: The Future

As the end of the Harry Potter era dawns - with millions still to be made from product extensions and paperback rights - some are wondering whether the time is ripe for the sale of the company. The most likely buyers would be (no surprise) private equity; however, there remains an obstacle in the form of the owner. Richard Robinson inherited the company from his father and has grown it into a $2.0billion diversified trade publisher and, while the company is public, he controls 4/5's of the board seats. It is unlikely that the company will be sold despite the arguments contained in this article by Bloomberg.com,

shares of Scholastic, the book's U.S. publisher, are trading at 0.66 times annual sales, compared with 1.04 times sales for rival U.S. book publishers. The shares would be worth more than $50 each, or 48 percent above their current price, if the company were to sell itself, Boyar and Stifel Nicolaus & Co. analyst Drew Crum said.

The Bloomberg authors argue that because Scholastic has not adequately reinvested the Potter windfall and found replacement revenue sources, now is the time to generate a high sale price. In reality, there can't be too much motivation to sell from Robinson since the company will continue to make reasonable profits and high cash flows. In addition, the company has had similar transitions before (Goosebumps and Clifford, the big red dog) - although the Potter franchise dwarfs earlier product successes - and at those junctures commentators wondered where the next earnings generator would come from.

The Bloomberg article does discuss continued operational issues most recently in their direct mail business,

Scholastic's latest stumble is in its direct-mail business, where subscriber delinquencies are rising. Yesterday, the company reported fourth-quarter profit of $40.4 million, or 93 cents a share, missing analysts' average estimate.

Nevertheless, the company has a plan to address these issues and shows no sign of preparing itself for an auction. As the largest Childrens' publisher, the company will have its pick of the best new children's products and, as it has in the past, will re-establish a new product franchise. The company may also acquire companies where the product mix could be leveraged to greater extent via Scholastic's distribution and management structure.

As a shareholder, there should be some concern over earnings growth in the next 12-24mths; however, assuming a premium will drive the stock price because of an anticipated acquisition would seem to be ill-advised.

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