Activist investing is not just about finding inefficiencies, putting money in and complaining. Jana Partners, along with the Ontario Teachers’ Pension Plan, have disclosed a 5 per cent stake in McGraw-Hill. The investors say they have discussed corporate structure with the conglomerate, code for a break-up. Jana is right: McGraw should split up.
The company’s enterprise value is under 7 times forward earnings before interest, tax, depreciation and amortisation. McGraw’s biggest segment, the Standard & Poor’s credit agency, has a sound publicly traded comparator in Moody’s, which trades at 8. Given that S&P is expected to generate over $850m in ebitda next year, according to Goldman Sachs, just arbitraging that gap could be significant. And McGraw has smaller franchises (notably financial analytics and business publications) with peers trading at double-digit multiples. There are no obvious synergies across the businesses. Analysts put the sum-of-the-parts value of the shares at around $50, a fifth above Monday’s close.
Jana is a bit late: management has already put its broadcasting segment on the block and has signalled openness to further change. But its table-thumping pushed shares up as much as 9 per cent. Will the move stick?
The key issue is McGraw’s educational publishing business, accounting for nearly a third of revenue. Most of McGraw’s segments could stand on their own or find homes with trade or financial buyers. Antitrust issues could make McGraw education a difficult buy for the competitors big enough to afford it, and the significant investment it requires (as reflected in recent quarters’ declining profits) means any buyer must be highly committed and have a vision for a changing industry. It may take some time to find someone like that.
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