McGraw-Hill - Proceeds Of The Education Business Are A Little Disappointing

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Shares of McGraw-Hill (MHP) rose 0.4% in Monday's trading session. The global information company announced the sale of its McGraw-Hill Education business to Apollo Global Management, for roughly $2.5 billion.

The Deal

McGraw-Hill announced on Monday that it will divest its education business to Apollo Global Management, for a total consideration of $2.5 billion. As part of the deal, McGraw-Hill will receive $250 million in senior unsecured notes at an annual interest rate of 8.5%.

The remainder of the company will be renamed into McGraw-Hill Financial. The division will be a high growth, high margin content and analytics company in the global capital markets and commodity markets.

CEO and Chairman Harold McGraw III commented on the deal:

After carefully considering all of the options for creating shareholder value, the McGraw-Hill Board of Directors concluded that this agreement generates the best value and certainty for our shareholders and will most favorably position the world-class assets of McGraw-Hill Education for long-term success.

McGraw-Hill Financial expects full year revenues of $4.4 billion for its 2012. At the presentation of the fourth quarter results, McGraw-Hill will provide an outlook for its 2013 guidance. The deal values the education business at 1.1 times annual revenues.

McGraw-Hill will receive an estimated proceeds of $1.9 billion, net of tax. It will use the proceeds to sustain its share repurchase program, or to make selective acquisitions, and pay off short-term borrowings. McGraw-Hill will classify the education's business as discontinued operations, and will take an expected $450-$550 non-cash impairment charge in the fourth quarter.

The company expects to close the deal late in 2012, or early in 2013. The transaction is subject to regulatory approval and customary closing conditions.


McGraw-Hill ended its third quarter of its fiscal 2012 with $1.25 billion in cash and equivalents. The company operates with $1.2 billion in short- and long-term debt, for a modest net cash position. This excludes the proceeds of the education business.

For the first nine months of its fiscal 2012, McGraw-Hill generated revenues of $4.83 billion. The company net earned $684 million for the period, or $2.29 per diluted share.

Full year revenues, including the education business, could come in around $6.3-$6.4 billion. The company could earn around $960 million, or $3.35-$3.40 per share on an adjusted basis.

The market values the firm currently at $14.4 billion. This values operating assets at 2.3 times annual revenues and 16-17 times annual earnings.

McGraw-Hill pays a quarterly dividend of $0.255 per share, for an annual dividend yield of 2.0%.

Some Historical Perspective

Year to date, shares of McGraw-Hill have risen some 15%. Shares started the year around $45 in 2012 and fell to lows of $42 in June of the year. A strong outlook sent shares to highs of $57 per share at the start of the month. At the moment, shares are exchanging hands at $52 per share.

Shares of the company traded at all time highs of around $70 back in 2007 and fell all the way to $20 in 2009 during the financial crisis. From that point in time, shares gradually recovered. Between 2008 and 2012, McGraw-Hill reported stagnant revenues around $6.3 billion. Net income rose from $800 million in 2008, to an expected adjusted income of $960 million this year. The estimate is on a non-GAAP basis as the company takes a large charge related to the divestiture of the education business.

Investment Thesis

The education business reported a 10% decline in revenues for the first nine months of 2012. The business generates roughly a third of total revenues, and roughly a fifth of operating earnings.

Operating assets are valued around $12.5 billion, given the net proceeds of almost $2 billion for the business. McGraw-Hill's assets, excluding the education business, are on track to generate revenues of $4.3-$4.4 billion. Adjusted earnings, excluding the education business could come in around $750 million. On this basis, the remainder of the assets are valued at 2.9 times annual revenues and 16-17 times annual earnings.

The divestiture is quite large and gives the company a lot of financial freedom. Net cash proceeds are roughly 13% of the company's current market capitalization. The divestiture should not come as a surprise given that the company announced a long-term review of its business in September. During the third quarter, McGraw-Hill repurchased some $295 million of its own shares, and it expects to repurchase another $200 million in the fourth quarter.

Investors are still a little disappointed with the deal, given that proceeds are less than the $3 billion anticipated. Consequently, the deal results in a $500 million impairment charge, roughly 3.5% of the firm's market capitalization. The prospects of education publishing have been under pressure given government budget cost cuts and the transition to digital publishing.

I remain on the sidelines. I see little value in the continued break-up of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.