PSO Pearson Plc

The McGraw-Hill Companies Inc. (MHP) recently announced that it has entered into an agreement with Apollo Global Management LLC (APO) to divest its education division for $2.5 billion.

The move is a strategic attempt on the company’s behalf to restructure its portfolio of businesses and concentrate more on high growth operations, thereby enhancing shareholder value through proper capital allocation.

The company expects to close the deal by the year end or early 2013 and will receive $250 million in senior unsecured notes, carrying an annual coupon of 8.5%.  

What led to the Decision?

This company has been scrutinizing its business segments for sometime as it lost substantial market value over the last 5 years. To add to its woes, its rating agency was criticized for its decision to downgrade the U.S. economy. Further, the New York based hedge fund, Jana Partners and the Ontario Teachers' Pension Plan, were pushing the company to split into four separate organizations.

In addition, the company’s education division has been confronting shrinking revenues due to reduced spending on textbooks by the government. Further, the company is facing execution risk associated with its plans to develop its education division into a subscription-based model through digital delivery.

McGraw-Hill engaged The Goldman Sachs Group Inc. (GS) and Evercore Partners Inc. (EVR) as the financial advisors to guide the company through the evaluation process.  

Birth of McGraw-Hill Financial

McGraw-Hill stated that the company will be known as McGraw Hill Financial, upon the completion of the deal and will primarily focus on capital and commodities markets and will include iconic brands like S&P Ratings, S&P Capital IQ, S&P Indices, Platts and Commercial Markets.

The company added that it expects revenues of approximately $4.4 billion from McGraw-Financial in 2012 with approximately 40% of it coming from international avenues.  

Moving ahead, McGraw-Hill expects to bear the impairment charges of approximately $450 million to $550 million in the fourth quarter of 2012 related to the sale.  Moreover, the company will utilize the proceeds from sales (approximately $1.9 billion net of tax) to buyback shares, reduce short-term debt obligations and for strategic acquisitions.

Currently, we have a long-term 'Neutral' rating on McGraw-Hill, which competes with Pearson plc (PSO). Moreover, the company holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
 

 
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