London-based publisher of The Financial Times and Penguin Books Pearson PLC (PSO) is reportedly looking into the possibility of selling their 61% stake in Interactive Data Corp (IDC). Pearson is signaling that IDC, while a fairly large portion of their business, is non-essential to the company’s strategy going forward. In their view it seems IDC as a market data and analytics provider does not mesh with their other assets which are largely educational (about 60% of revenue) and mainly sold to retail clientele. In contrast, IDC’s clients are mostly large financial institutions. The Bedford, MA based Interactive Data Corp could find a number of potential suitors in firms that reach a similar clientele such as McGraw-Hill (MHP), Bloomberg LP, Thomson Reuters (TRI) or even private equity.
Pearson’s stock traded slightly higher Friday as this may help them streamline their business and provide about $1.5 billion in capital. IDC is surging about 13% in afternoon trading. Pearson will not guarantee that anything will happen or any sort of time table, as they are simply exploring their options at this point. However, the market is clearly excited by the prospect that IDC may be sold (potentially outright) in such a move. An analyst at UBS said that the sale of Pearson’s stake would allow IDC to utilize cash flows more appropriately to focus on better growth areas.
Coming into the day, we had a Fairly Valued rating on Pearson and an Undervalued rating on IDC. IDC is clearly priced less attractively following the surge in today’s action but we think it may still have value based on the company’s strong underlying fundamentals. For example, in the past ten years the market has been willing to pay 3.4x to 5.0x revenue per share, and after today’s run-up the stock is just now touching the bottom end of that range. On a price-to-cash earnings basis, the stock has historically traded for 13.4x to 19.9x, but as of the time of this note, the current metric was only 12.6x. Based on the current fundamentals, we think that IDC could reasonably sell for $34 per share. It will surely take time to more fully understand the future for these two companies, but as of this moment the market seems to be cheering on the possibility of a sale.