Our first update of the year from the professional publishing research division at BNP Paribas reveals…
That yesterday Reed Elsevier raised USD1.5bn of debt by issuing a 5-year bond which will be used to refinance part of the USD4.2bn bridge loan used to acquire Choicepoint in H1 08.
BNP Paribas write:
* Refinancing is more expensive than anticipated
While this debt issue reduces the refinancing risk, it cost more than expected. The new 5-Year bond was priced with a spread of 640bp – 300bp above our model assumptions and 400bp above current 5-Year CDS spreads. It is also c.160bp above the 5-year EUR1bn bond that Vivendi issued yesterday as well. This higher-than anticipated cost of debt has a negative impact of
80bp on the company’s WACC, all else being equal, or 10% of the fair value per share. In addition, it leads us to cut our EPS 09e by 2%.
And then they add that because they now remain cautious on Reed stock they continue to prefer Wolters Kluwer or
Pearson.
And write:
We leave our target price unchanged as the recent reduction in the equity risk premium offsets the higher cost of debt in our DCF. However, Reed Elsevier trades at a 20% premium to its peers with a 2009e EV/EBIT of 10.4x and a P/E 09e of 12.3x. We believe the market may be overpricing the resilience of a company which now derives close to 50% of its revenues from
exhibitions, B2B magazines and cyclical transactional regulatory revenues. Alternatively, the valuation of the stock may already be pricing the cost savings benefit management is currently working on. We would avoid the stock ahead of the arrival of a new CEO in H1 09 and prefer the more attractively valued Pearson or Wolters Kluwer.
That must be nice reading for McInstry and Kluwer senior management.. eventually to see themselves valued as a more attractive proposition than Reed.
