Reed Elsevier Cancels Sale

LONDON, Dec 10 (Reuters) – Publisher Reed Elsevier (ELSN.AS: Quote, Profile, Research, Stock Buzz) (REL.L: Quote, Profile, Research, Stock Buzz) dropped plans to sell its trade magazines division, estimated to be worth more than $1 billion, blaming worsening economic conditions and knocking its shares.

Reed Elsevier had hoped to use proceeds from the sale to help pay for the $4.1 billion cash acquisition earlier this year of insurance data and analytics company ChoicePoint. It said on Wednesday it would now proceed with issuing term debt.

The auction process had been closely watched as a signal that private equity groups may be ready to make a comeback after being forced to retrench by the global dearth of credit — albeit helped by Reed’s offer of staple financing.

Reed shares closed down 3.4 percent in London and down 2.7 percent in Amsterdam, underperforming a 1.6 percent drop in the DJ Stoxx European media index .

Reed said it had become clear during talks with short-listed bidders that it would not be possible to agree “acceptable terms” for the sale of Reed Business Information (RBI), whose titles include Variety, Farmers Weekly and New Scientist.

“Whilst the short-term outlook for RBI is challenging given the recent deterioration in economic outlook, we believe the business has significantly more value to our shareholders than could be realised in a transaction at this time,” outgoing Chief Executive Crispin Davis said in a statement.

A source familiar with the matter told Reuters in October the financing package might come in smaller than expected, causing bidders to re-examine their offers.

Reed said it remained on track to deliver its goals for this year of “good revenue growth, meaningful margin improvement and the strongest constant currency growth in adjusted earnings per share for a decade”.

UBS analyst Polo Tang wrote in a note: “We believe much of the negative news has been priced into the shares. He added: “The main issue from the RBI deal breaking is likely the focus on refinancing.”

Reed had warned that it may not succeed in selling RBI, whose estimated value had fallen to between 650 million and 850 million pounds ($961 million to $1.26 billion) from as much as 1.3 billion pounds when the sale was announced in February.

The first repayment of $2 billion of debt taken on for the ChoicePoint acquisition is due in March 2010, with a second and final payment of $2.175 billion in March 2011.

“Reed Elsevier is in a strong financial position and we are very confident in our ability to refinance,” Davis said.

HIGHER COST OF DEBT

RBI is the most cyclical unit of the Reed Elsevier group, which has largely weaned itself away from dependence on advertising in favour of subscriptions and online products that professional customers embed into their work processes.

It brought in 906 million pounds of revenue in 2007, or 20 percent of Reed’s total sales, and accounts for less than 10 percent of group operating profit and cash flow.

The sale would have been the final piece of Davis’s gradual transformation of Reed Elsevier from a publisher of printed journals and textbooks into a digital professional information provider before he hands over to Ian Smith in March.

Reed is considered a strong defensive play in media, much of which has been shaken by sharp falls in ad spending. It trades at 10.8 times 2009 earnings, according to Reuters Estimates, compared with an average of 8.6 percent for European publishers.

Petercam analyst Thijs Berkelder estimated the sale’s collapse could mean a higher cost of debt for Reed of 7 to 7.5 percent versus 6.5 percent, depending on the duration.

“Financing won’t come cheap,” Berkelder wrote. “All-in-all it, in our view, will become difficult for Reed Elsevier to deliver its shareholders a premium yield in the coming year.”

Berkelder reiterated a “reduce” recommendation on Reed shares following the announcement and cut the broker’s share price target to 9.80 euros from 10.50 euros.

Reed said it still aimed to sell RBI once conditions had improved but that in the interim it would be run as a separate division headed up by Keith Jones, formerly chief executive of RBI’s British operations. ($1=.6763 pounds) (Editing by Andrew Macdonald and Mike Nesbit)

By Paul Hoskins and Georgina Prodhan