The collapse of the sale of publisher Reed Elsevier’s business information unit was inevitable. It’s what happens next that’s crucial.
Reed was planning to use the sale proceeds to pay down debt from its $4.1 billion acquisition of U.S. personal data firm Choicepoint earlier this year. If it doesn’t find another solution, it risks losing its A- credit rating.
So now it faces a choice. Most likely, it will launch a $2 billion bond issue in January ahead of the first tranche of Choicepoint debt falling due in March – a move likely to raise Reed’s overall cost of financing by 9%, according to analysts.
The alternative is to roll over the existing debt for another year in the hope of getting the sale of RBI away next year. But if it fails, it faces having its credit rating downgraded which would push up the cost of financing still further. Fitch has already revised Reed’s outlook to negative from stable because its net debt will total three times Ebitda at the year end. That compares to around one times for sector peers Pearson and United Business Media.
On the plus side, Reed is a broadly defensive stock within the media industry. RBI, the unit that was up for sale and that’s been worst hit by the economic downturn and advertising slowdown, accounts for less than 10% of operating profit. Reed’s scientific and legal publishing business and exhibitions and events continue to deliver a solid performance.
But Reed’s insistence on selling RBI as a whole, rather than piecemeal, now looks foolish. While breaking up the business could have been a protracted process, there was more interest in individual country units such as the U.K., U.S. or Dutch ones than in the division as a whole.
Expect journal prices to increase….