Friday, January 19, 2007

Private Equity Deals

If you have the cash to invest in publishing company why not go for the best one. Which in my opinion would be Pearson.

With Thomson Education on the market, Houghton Mifflin sold, Wiley purchasing Blackwell Publishing, Wolters Kluwer Education for sale, there is a lot on offer and this week the rumors were flying around Pearson. Pearson has made no public comments regarding selling any of the company yet the PE bankers and the equity analysts think something is a foot. The Pearson stock closed at a four year high today (CNN). No doubt this is very pleasing to all the management options holders.

Last week, Reed Elsevier was also touted as a non-too-obvious PE candidate and it would seem you are not worth your salt as an equity analyst in the media industry if you don't declare one of these conglomerates as an ideal candidate for Private Equity players. Reed have a complicated ownership structure which, while simpler than when Reed and Elsevier were put together, seems to be a concern. When (or if) it comes down to it I doubt this will be an issue. As with Pearson, I suspect that the managers with options will be very happy with the stock price escalation. Last week the stock was at 600p now it is at 611p. When I was at Reed in 2000, the stock was over 700p and this was before they purchased Harcourt and the significant slump in advertising revenues that hit their trade publications business. Point is, I wonder if a valuation will push the share price up a lot higher?

In recent years Pearson has been chastised for under-managing a collection of valuable publishing assets but this died down a little over the past 12 months. Their financial results and forecasts have been on target and results in the Education group have been particularly strong. This is especially true when Pearson education is compared to Thomson in terms of acquisitions made, growth rate and operating margin. In Thomson's defence, I am sure that it has been difficult operating in within the Thomson corporate environment when reservations may have been expressed about Education for a while. Thomson relative to Pearson has probably lost momentum which a sale will quickly fix and we will see a renewed Thomson Education as a result.

Currently, the PE bankers see an opportunity to buy a large 'holding company' put some lipstick on it and sell parts off in short order. In selling the parts - The Financial Times, Pearson Education - they would expect to make a killing. (Pearson Education could be split into College and School). Management is clearly not happy with the current debate but if an offer is made then they obviously need to consider it. What may result is some appeasement resulting in the sale of one of the tastier chunks. As I predicted for 2007: Murdoch will buy The Financial Times.

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