ChoicePoint Chooses to Sell

With expansion efforts stalling, the info provider jumps at Reed Elsevier's buyout offer

Talk about a quick fix. Shares of ChoicePoint (CPS), which had been languishing near a 52-week low of $31.87, surged on Feb. 21 after the provider of insurance information and ID verification services said it had agreed to be acquired by Anglo-Dutch British information provider Reed Elsevier, owner of Lexis Nexis, for $3.5 billion in cash, or $50 a share -- a 49% premium to its closing price of $33.66 on Feb. 20.

At 15 times ChoicePoint’s EBITDA, "it’s a very generous price," said Brian Ruttenbur, managing director at Morgan Keegan.

While Reed is commonly referred to as a media company, "it’s all about content and databasing," Morgan Keegan’s Ruttenbur said. "That’s what ChoicePoint has been about for the last 10 years." Reed is banking on a successful combination of ChoicePoint’s data with its own Lexis Nexis database.

On Feb. 21, Reed Elsevier, which is owned equally by Reed Elsevier PLC (RUK) and Reed Elsevier NV (ENL), announced its 2007 earnings of £1.2 billion, nearly double 2006’s £678 million. The company says the all cash deal should add to its earnings during the first year.

The deal also marks an abrupt end to turnaround plans at the Georgia-based information provider. After experiencing years of rapid growth following its 1997 spin-off from Equifax, ChoicePoint’s stock price settled into a trading range, bouncing back and forth between the low 30s and mid-40s. The problem wasn’t ChoicePoint’s core product, a database of insurance claims which accounts for at over 50% of the company’s $982 million in revenues and 80% of its operating profits. Rather, starting in 2001, management tried to expand beyond ChoicePoint’s core business, funneling the cash from its insurance products into acquisitions, including i2, a software provider to law enforcement agencies.

Most, however, have been failures. Software developed for the government agency market failed to gain traction. Legal troubles involving misuse of consumer data cost the company $20-$30 million in lost revenues – as well as a hefty fine.

In 2007, ChoicePoint announced an end to acquisitions to focus on its core insurance and background check businesses. It sold EquiSearch and its bulk bankruptcy, liens and judgments records business. The change had little noticeable effect and shares traded at a 52-week low as recently as January 22, 2008. Still, George Sakellaris, an analyst at Garp Research in Baltimore believes that, given time, it had the makings of a success. "I think if management was successful with that strategy, we were looking for earnings to close to double over the next three years to what they reported in 2007," he said.

Now, ChoicePoint has decided to forgo its turnaround plan – and its independence – to join up with Reed Elsevier. "Expansion takes a lot of time to develop. Maybe they got tired fighting the valuation they were getting on the market," said Kevane Wong of JMP Securities in San Francisco. "It's hard to turn down a 50% premium."

ChoicePoint referred questions to Reed Elsevier, which did not return calls for comment.