Speculation over Reed Elsevier (Again): Missing the Bigger Point

Several UK Sunday newspapers report new speculation about the future of Reed Elsevier and specifically whether the company could be ripe for a private equity buy-out. Shares were volatile on Friday in what could be more a reflection of market boredom than anything else. Since Erik Engstrom took over the CEO role a year ago, analysts have speculated that the company would either shed assets or be taken private given the company's languishing share price and inconsistent performance across the group. Last week the company confirmed their full year guidance which calls for "modest" erosion of margins given a strained revenue outlook (Bloomberg):

“As previously stated, a modest reduction year-on-year in adjusted operating margin is expected due to a weak revenue environment and increased investment in legal markets,” the London-based company said in a Business Wire statement today. “Any sustained recovery is expected to be gradual and remains dependent on economic conditions.”

Subscription sales in many professional markets are still constrained by “low customer activity levels and budgets,” while advertising and other cyclical markets continued to stabilize, according to the statement.

“In the second half we have continued to sharpen our focus in key markets, through new product development, increased sales and marketing activities, and portfolio realignment,” Chief Executive Officer Erik Engstrom said in the statement.

Weakened renewal subscriptions are likely to constrain revenue for sometime given annual subscription cycles in addition to weakness in the professional markets such as their legal market. The company has sold off some smaller business and products - last week they sold a German business unit to Wolters Kluwer for example but in total these seem minor compared with what analysts and potential private equity investors may be contemplating.

The Telegraph tries to put some more meat on the bones of a somewhat old story by suggesting that the management team at Reed Exhibitions is working with private equity groups Cinven and Apax to prepare a bid for the Exhibitions business unit. Private equity as said to respect the management of the group: Whether Engstrom respects them on Monday morning may be another story.

These titillating financial stories gloss over some difficult issues for Reed Elsevier. In particular, the company is likely to see significant competition from Bloomberg as that company aggressively targets the legal and regulatory market place. Unfortunately for Reed, they may be strategically limited by not having a strong financial and business news unit which is the core of Bloomberg and which Thomson West - their other competitor - possesses in Thomson Financial & Reuters. (A deal between Reed and Reuters would have been strategically more important than the deal the company ultimately made to acquire Choicepoint). Whereas information companies built their businesses over the past 15yrs on organization around silos - financial, news, medical, legal, etc. - the rapid improvement in search, taxonomies and user interface are enabling information companies to 'reintegrate' their siloed content. This is where Reed maybe disadvantaged vis a vis Bloomberg and Thomson and whether that can be solved by taking the company private is a crap shoot. But then, that's what private equity is good at.

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Michael Cairns

See also Crains (Reg Required). C/P headline into Google.