McGraw-Hill Breakup Valuation May Be as High as $70 a Share, Lazard Says
McGraw-Hill Cos. may accelerate its plan to spin off businesses, under pressure from hedge fund Jana Partners LLC, which bought a stake in the textbook publisher and owner of Standard & Poor’s.
McGraw-Hill’s breakup value would be about $55 a share, according to analysts at Lazard Capital Markets and JPMorgan Chase & Co. That’s 33 percent more than the company’s $41.41 closing price yesterday on the New York Stock Exchange. McGraw- Hill rose $3.02, or 7.3 percent, to $44.43 at 4 p.m. today, the biggest advance since September 2009.
McGraw-Hill held talks with Jana Partners to discuss corporate structure and future plans, the hedge fund said late yesterday in a filing. Spinning off the education business, in which revenue has dropped the past three quarters, will create value, said Basu Mullick, manager of the $2.37 billion Neuberger Berman Partners Fund, which holds McGraw-Hill shares.
“Ás patient, long-term shareholders, we see that inherent value,” Mullick said. “What’s not clear is if management is willing to act on it.”
Chief Executive Officer Terry McGraw said last week that the New York-based company is conducting a strategic portfolio review. In June, McGraw-Hill said it planned to sell its broadcasting group and hired Morgan Stanley to find a buyer.
McGraw-Hill was the best-performing stock today in the Standard & Poor’s 500 Index.
Meeting Next Week
Jana Partners, which manages about $3 billion, holds a 5.2 percent stake in McGraw-Hill, together with the Ontario Teachers’ Pension Plan, according to the filing. Charles Penner, a spokesman for the fund, declined to comment, as did Deborah Allan, a spokeswoman for the pension plan.
Jana, based in New York, and Ontario Teachers are scheduled to meet with McGraw-Hill executives next week, said two people with knowledge of the matter. Barry Rosenstein, Jana’s managing partner; Bill Royan, a vice president at Ontario Teachers; and Terry McGraw, plan to attend the meeting, the people said.
It would be the second meeting for Rosenstein and McGraw, who also met last month, the people said. Rosenstein discussed changing the company’s business mix in general and didn’t push for specific changes, the people said.
McGraw-Hill told employees about Jana Partners’ stake in an e-mail last night, Patti Rockenwagner, a spokeswoman for the publisher, said today.
“We realize this news has the potential to cause a certain amount of distraction, but as McGraw-Hill employees, the best thing we can all do is continue to work hard,” the company said in the e-mail.
McGraw-Hill expects “additional significant actions in 2011” as part of the review, spokesman Jason Feuchtwanger said in an e-mail yesterday. The process is “designed to unlock superior shareholder value,” he said.
McGraw-Hill’s financial units buoyed earnings in the second quarter, offsetting the drop in education sales. Net income climbed to $211.1 million, or 68 cents a share, from $191.1 million, or 61 cents, a year earlier. Sales at S&P, the world’s largest bond rater, rose 19 percent to $480.3 million, while education revenue fell 5 percent to $536.6 million.
“This is a company that has been a mini-conglomerate of information database businesses, none of which are all that related,” said Douglas Arthur, an analyst at Evercore Partners Inc. in New York. “The education business is capital intensive, low margin and plodding in growth.”
McGraw, who has been chief executive since 1998, may be able to resist Jana Partners’ requests, Arthur said. He owns 4 percent of the company, worth about $493 million as of yesterday’s close, according to a regulatory filing.
“It’s going to take more than 5 percent to push the management around,” Arthur said. Having a portfolio of different businesses can cushion weakness in one unit, he said.
Chuck Freadhoff, a spokesman for Los Angeles-based Capital Group Cos., McGraw-Hill’s largest shareholder, declined to comment, saying the firm doesn’t discuss individual holdings. The company has a 12 percent stake, according to Bloomberg data.
Based on the value of each of its units, McGraw-Hill could be worth $55.04 a share, JPMorgan analyst Michael Meltz wrote yesterday in a note. “Management could consider selling/spinning its Education segment,” he said.
$70 a Share
William Bird, an analyst at Lazard, put the breakup value at about $55 a share in a note yesterday. The value could climb to $70 if the McGraw-Hill buys back stock and sells businesses at a premium, he said. At $70, the company would be valued at $21.1 billion, according to Bloomberg data.
McGraw-Hill, founded in 1888 by McGraw’s great-grandfather, James H. McGraw, climbed as high as $71.96 in 2007, before the credit-market seizure cut demand for S&P’s ratings.
Jana Partners has a history of pressuring companies that then make changes. In 2008, a group of investors led by the fund called for Cnet Networks Inc. to replace board members, two months before CBS Corp. agreed to buy the news provider at a 45 percent premium to its share price.
On May 16, Jana said in a regulatory filing it increased its stake in El Paso Corp. to about 4 percent. Eight days later, the natural-gas pipeline company said it would spin off its exploration and production unit.
“The most time- and cost-effective activism is that initiated long after the target itself determined to pursue a strategic change,” Chapman said yesterday in an e-mail. “When done right, it’s like standing outside at 5 a.m. and demanding the sun to rise.”
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