NEW YORK McGraw-Hill Cos Inc MHP.N, agreeing to investor demands, said on Monday it will divide itself into a markets data company that includes its Standard & Poor's ratings businesses and an education company for textbook publishing.
The breakup of the mini-conglomerate follows public demands starting in July from the Ontario Teacher's Pension Fund and hedge fund Jana Partners LLC for a broad reorganization. The activists suggested breaking up the company into more than two pieces to highlight the value of its individual equities, commodities and financial analytics units.
"It's a first step," said Pat English, chief executive of Fiduciary Management Inc, a large holder of McGraw-Hill shares, who argues for a more radical plan.
"It doesn't make sense to have S&P Credit Ratings, S&P Indices, Capital IQ, Platts and other information companies under one roof," English wrote in an e-mail.
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Investors boosted McGraw-Hill's shares 3.98 percent on Monday to close at $40.26 a share after it also said it will accelerate plans to complete $1 billion of share buybacks this year. The company has repurchased $541 million so far this year.
The stock, however, still trades far below the sum-of-the-parts estimates of more than $50 a share that several analysts forecast in July.
The move could hurt McGraw-Hill's credit-worthiness. Moody's Investors Service put its A3 rating on $1.2 billion of McGraw-Hill debt on review, saying it will look at the loss of business and customer diversity from the split.
"We intend to review the scope and impact of these steps," Jana and the Canadian pension fund said in a joint statement that noted they have identified additional ways "to unlock shareholder value." Monday's announcement is a start to "reversing years of underperformance," they wrote.
Terry McGraw, the 63-year-old chairman and chief executive of the company founded by his great-grandfather, said he will lead the bigger and more profitable part of the reorganized company that will include the S&P credit rating, market index and Capital IQ corporate and markets analytics businesses.
Analysts have called for McGraw to break up the company for years. He said executives and directors waited to develop a reorganization plan until they were confident last year that regulatory pressure on its Standard & Poor's ratings business was beginning to subside after the 2008 financial crisis.
The move comes as the education business is under pressure from reduced spending by strapped school districts and college students. At the same time, earnings from McGraw-Hill's ratings business have declined from their credit-bubble peak.
"VERY BEST THINKING"
McGraw-Hill Markets, the working name for the business, will include Platts, a commodities markets information company some analysts said on Monday is too profitable to be hidden with the other capital markets segments. Platt's products have been in high demand amid the global boom and volatility in commodities.
In an interview, McGraw said the criticism was fair, but repeated comments from a conference call in which he termed the two-way split, "the very best thinking of this management team and the board of directors."
McGraw said keeping the markets businesses together will ensure the company is big enough, has enough access to capital and offers a product range no single competitor can rival.
"You can create integrated solutions for a growing number of customers who want products across multiple asset classes," McGraw said.
Company spokeswoman Patricia Rockenwagner took issue with the activist investors' arguing that the company's shares have underperformed the market, saying that McGraw-Hill shares annualized returns through July 31 beat that of the S&P 500 for the past 10 years and one year.
The plan, which is expected to be put in place by the end of 2012, leaves several questions unanswered. The announcement said nothing about a succession plan and the company said it will start a search to find a CEO for McGraw-Hill Education. The textbook business is now run by Robert Bahash, 66, McGraw-Hill's former chief financial officer who stepped into the role when an executive left last year.
The investment banks Goldman Sachs Group and Evercore Partners, which are advising on the spinoff, are still working on details. Executives also have to devise a distribution plan for the shared costs of the markets and education businesses.
McGraw-Hill also must deal with several units that do not fit into the two-company structure. In June, it put a handful of television stations up for sale. Investors said other properties such as trade magazines covering the aviation and construction industries are oddball holdings.
During a conference call with analysts, McGraw and other executives said the restructuring would "significantly" reduce the company's $1 billion expense base, but declined to detail potential savings.
The company, which jarred the global economy last month by downgrading the credit rating of the U.S. government, was criticized for giving "triple-A" credit ratings to complex securities filled with low-grade subprime-mortgages.
S&P's chief competitors, Moody's Investors Service and Fitch Ratings, have not followed it in downgrading the United States.
The two-way break-up will be structured as a tax-free spinoff of the education business the company said in a statement.
The markets businesses will have about $4 billion of revenue in 2011 and the education businesses will have about $2.4 billion in revenue, it said.
The remaining work includes reviews of the company's brand names. McGraw said the name of McGraw-Hill Markets, which is to hold Standard & Poor's ratings, S&P indexes and S&P Capital IQ, could be changed to drop his family name in favor of S&P.
"Whatever way gives us the best possible positioning to create demand from customers is what we are going to do," McGraw said in the interview.
Asked whether he intends to retire in two years when he turns 65, McGraw said that, while the company's bylaws call for retirement at age 65, the board of directors can make exceptions.
"I am going to let you see what we do with this growth and value plan and if it goes well, who knows," McGraw added.
(Reporting by David Henry in New York, Jochelle Mendonca in Bangalore; editing by Sriraj Kalluvila, John Wallace and Andre Grenon)