Friday, February 22, 2008

More Reed Elsevier

Reed announced preliminary results yesterday which were somewhat overshadowed by the announcement of the Choicepoint acquisition and the proposed divestiture of the Reed Business Information division.

In the earnings presentation CEO Davis noted that their revenue growth is ahead of the market, their operating margin continues to improve year over year and the company is delivering good cash generation and EPS growth. Over the past four years underlying revenue has grown between 3-6% per year but it is operating profit which has seen annual growth expand from 3% in 2004 to 10% in 2007. Operating profit growth has improved faster than revenue due to the changing sales mix toward on-line revenues as well as corporate wide initiatives on costs reduction and consolidation.

In discussing the proposed divestiture of the RBI business, Davis used justification similar to the comments used to explain the Harcourt divesture but it boils down to several things. First, the online component of RBI is not growing fast enough to keep up with Elsevier, LexisNexis and Martindale. This will dampen long term revenue growth for RE. Second, the timing and investment required to speed the process could be significant and Third, the payback is not obvious in so far as online ad based 'magazine-type' content has yet to establish itself as a business that can replace revenues from print based subscription and advertising. Davis's comments reflect forward thinking regarding the strategic growth of RE as a platform based content solutions provider: Financially the current position of RBI is quite strong versus their segment. Indeed their performance supports the suggestion that Davis will not rush to sell RBI and is open to various scenarios.

In 2007, RBI revenues were £906m up 3% and operating income was £119m up 8% over the prior year. Offline revenues account for 70% of total revenues. Despite the long term concerns of Davis, this appears to make RBI a £300m online trade magazine/business information publisher which will prove a strong selling point for investors when they come to kick the tires. (Online revenues were up 20%). Currently, RBI includes Reed Exhibitions which the company has decided to retain. According to the company, Reed Exhibitions has continued to grow aggressively and perhaps, there are more business opportunities across the RE properties which management believe can be leveraged. Additionally, management may be considering expanding Exhibitions through acquisition. Exhibitions revenues were up 12% in 2007 and operating income up 8%.

It will be interesting to see how this divesture plays out. The division has some brand-name assets including Variety and Publishers' Weekly but it may be the more mundane titles that have been driving the online growth and investors may be more impressed with these units than the bigger brands. That could lead the way to a break-up strategy with some of big brand properties going to separate buyers and a strategic buyer purchasing the balance of the company. For example, I could see Variety going to Zuckerman or Wasserstein.

Note: Reed also noted the sale of Harcourt generated total proceeds of $4.95bn which was a 3.0x multiple of 2006 revenue and a 20.8x multiple of 2006 adjusted operating profit. The divestiture generated a substantial disposal gain.

Reed Preliminary Results presentation.

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