Reed Elsevier Acquire Choicepoint

In my predictions for 2008 I noted that we would see increased activity in the insurance business information space. In my view, this space is ripe for the type of consolidation seen in law, tax and business information that results in dedicated and must have information platforms for practitioners and analysts. Both Thomson and Reed dominate the law and tax segments and it looks like Reed is taking the first step to dominate and create a platform application for the insurance industry. Reed announced this morning that they will by Choicepoint for $3.5bill and assume $600mm in debt.

Commenting on the acquisition, Sir Crispin Davis Reed Elsevier's Chief Executive Officer, said: "The acquisition of ChoicePoint represents a major further step in the building of our risk management business and in the development of Reed Elsevier's online workflow solutions strategy. The market growth in risk information and analytics is highly attractive and ChoicePoint brings important assets and market positions that fit well with our existing business and, in combination, can be leveraged to very good effect.

The new unit will be combined with existing risk management revenues in the Lexis business unit that will result in a business unit with over $1.5billion in revenue.

Other points from the press release:

• ChoicePoint has a leading position in providing unique data and analytics to the attractive insurance sector (over 50% of Choicepoint's $982 million revenue and 80% of its business operating income from continuing operations in 2007) and highly complementary products and new capabilities in the screening, authentication and public records areas.
• The combination of ChoicePoint's highly regarded data and analytics assets with LexisNexis's market leading technology can be leveraged to create greater opportunities in addressing the growing risk information and analytics needs in insurance, financial, legal, screening, law enforcement, public safety, healthcare and other sectors.
• The combination will improve top line growth and deliver considerable synergy benefits through the application of powerful technology, increased scale and integration of resources.
• The acquisition will accelerate Reed Elsevier's revenue and profit growth; is accretive to adjusted earnings from the first year; and is expected to deliver a post-tax return on capital in excess of Reed Elsevier's cost of capital by the third year, with returns continuing to climb thereafter.
• Consideration of $50 per share in cash; unanimous recommendation of the ChoicePoint board; subject to ChoicePoint shareholder and regulatory approvals. Acquisition to be financed from committed new bank facilities.
• The acquisition significantly enhances Reed Elsevier's portfolio through expansion in these attractive long term growth markets, and accelerates Reed Elsevier's progress in providing online solutions embedded into customer workflows.

The strategic importance of this acquisition for RE is noted in the last bullet where the company emphasizes the importance of workflow solutions for their customers. Information is not a commodity, but is only a component of a broad market offering. A company offering monolithic data products; that is the online equivalent of a printed database, will continue to face market challenges in competition with more integrated offerings where content is a component in a larger holistic workflow tool.

In a closely related story, Reed also announced that they will sell the Reed Business Information unit. This sale has long been rumoured and analysts have suggested that Reed should have vacated the space long ago; however, Reed were progressing through a logical strategic revamp which has culminated in the acquisition of Choicepoint, the divestiture of Harcourt and now the sale of RBI. The company says the divestiture will reduce exposure to the cyclical advertising markets, which of course was as true today as it was five years ago. Best guess would be private equity.

The same press release also notes their full year 2007, results with underlying revenue growth of 6% supported by online information and workflow solutions. Topline reported revenue was £4,584m up 2%. The company also saw operating margin improve as a result of favorable product mix with underlying margin up over 100 basis pts. Adjust EPS was up 12% in constant currency. The company noted that adverse exchange rates materially impacted the results. More in the press release.