Investors push McGraw-Hill for changes

Mon Aug 1, 2011 9:05pm EDT
 

By Joe Rauch

CHARLOTTE, North Carolina (Reuters) - A Canadian teacher's pension fund and a New York hedge fund are pushing McGraw-Hill Cos Inc MHP.N to boost its market value and might agitate for steps such as breaking off parts of the company.

The Ontario Teachers' Pension Fund and JANA Partners LLC said in a securities filing on Monday that they bought 5.2 percent of the shares of the New York-based company, which produces textbooks and trade publications, runs nine television stations and owns ratings agency Standard & Poor's.

McGraw-Hill said in June it was reviewing its disparate businesses to make sure they made sense for the company and decided to sell off its broadcasting group.

Analysts said the move increases pressure on McGraw-Hill's management.

"This is a kick in the pants," said Jason Ware, an equity analyst with Salt Lake City-based Albion Financial Group. "It brings a little higher sense of urgency."

JANA said in its filing it had discussions with McGraw-Hill about the company's operations, strategy and future plans, Both investors said they might have more discussions along those lines with the company.

Analysts said the company's educational unit -- which makes textbooks -- has been a drag on overall earnings, while ratings agency Standard & Poor's has been one of McGraw-Hill's bright spots.

Peter Appert, a Piper Jaffray & Co analyst, said McGraw-Hill's disparate businesses could be worth as much as $52 per share if valued separately. McGraw-Hill's stock closed on Monday at $41.41 per share, down 0.46 percent, or 19 cents.

Appert said the company could follow the Dun & Bradstreet model -- noting that company spun off major business units while under investor pressure to increase shareholder value.

Dun & Bradstreet Corp (DNB.N: Quote) spun off Moody's Corp (MCO.N: Quote), a ratings agency competitor to Standard & Poor's, in 2000.

"That's a good analogy, in my mind," Appert said. "That created a lot of shareholder value by breaking it up."

A McGraw-Hill spokesman said in a prepared statement that the company was reviewing its business operations and would announce additional "significant actions" in 2011, and was evaluating its general and administrative costs company-wide.

BREAKING UP IS HARD TO DO?

A JANA spokesman declined to comment and an Ontario Teachers' spokeswoman was not immediately available for comment.

Conglomerates are often difficult for investors to value, given that they require expertise in multiple industries. The different businesses in a conglomerate often do not gain anything by being housed in a single company, which is why activist investors have been pushing to break up conglomerates since the 1980s.

A raft of other companies have announced in the last year that they were splitting up, including ITT Corp (ITT.N: Quote), which was pressured by activist investor Ralph Whitworth of Relational Investors.

JANA and, to a lesser extent, Ontario Teachers' are known for buying stakes in companies and pressing for changes.

The Ontario Teachers' fund holds a 2.3 percent stake in McGraw-Hill, while JANA Partners holds a 2.9 percent stake.

McGraw-Hill previously owned BusinessWeek magazine, which it sold to Bloomberg LP, a competitor of Thomson Reuters Corp.

(Reporting by Joe Rauch; editing by Robert MacMillan and Andre Grenon)