Normally it’s easy to be correct in hindsight but last month we were the only business publication that predicted that the changes in Reed Elsevier’s share price and the doubling of the price of their Credit Default Swap instruments made it likely they would either fall to a private equity bid or put their education business up for sale.

Sir Crispin Davis, Reed’s CEO, has announced they will be selling their education business. While many pundits are claiming the sale is due to the unpredictable revenues at Harcourt, they seem to have forgotten that it is in the educational testing arena that Reed has lost out to its major competitor Pearson. Pearson’s investment in this area has been significant and apart from a few hiccups at Edexcel, they have beaten Reed hands down in this growth sector.

Who will buy Harcourt? Add their education business to that of Thomson Learning and Wolters Kluwer and you have a serious surplus of educational assets all on the market at the same time. Pearson are thought to be an unlikely buyer for any of these assets, although they may bid for Wolters Kluwer as this would only require EU rather than US regulatory approval. This leaves us with private equity(PE) firms. Yes, they have the money to buy these assets and then what? With all of these major international media companies abandoning the education market, even if PE companies buy Reed/Wolters Kluwer/Thomson, after gearing them to the eyeballs and sweating the assets, who is then going to buy them for a much larger price in another two to five years? The names being touted include Riverdeep, Informa, Lagardere, McGraw Hill and SanonaWSOY, but they would probably only want bits of these businesses. In the world of PE, the number of potential suitors is far larger and includes firms like Candover, Permira, 3i, CVC, Kronberg Kravis and Roberts, Blackstone, Texas Pacific Group, Bain Capital, Macquarie and Apax Partners.

So it seems the fundamental problem is not who buys them now, but who might buy them in the future. The break-up of Granada Learning by Veronis Suhler Stevenson is, we think, a more likely strategy. It may be more costly to sell several companies, but will be more profitable than trying to flip a large £2bn+ educational business in three to five years’ time.

One of the small ironies of Reed’s sale is that in 2000 they paid £2.9bn for Harcourt and then a year later sold its college textbook business to Thomson for £1.1bn.

Don’t rule out News Corporation. They have bits of education scattered throughout the group and have been looking at education at a strategic level for some time. While it doesn’t have the glitz of movies and TV, snapping up one or more of these education businesses would be exactly the sort of audacious, transformational move that has seen Rupert Murdoch take a single newspaper (published in South Australia) and build it into the world’s largest and most successful media conglomerate.

It will also be interesting to see whether having all these assets for sale at the same time depresses the price. UBS, who are handling the sale for Reed, say they expect to complete the sale by the end of the year, but if either of the other sales is at a significant discount this could push the deadline into early 2008.
www.informa.com
www.lagardere.com
www.mcgraw-hill.com
www.newscorp.com
www.pearson.com
www.reed-elsevier.com
www.riverdeep-learning.co.uk
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