Media Fortune Fame & Folly

Is this the answer for RELX?

The professional information groups RELX and Wolters Kluwer are a sprightly middle-aged couple who have spent a lifetime flirting together but successively getting married to others. You’ve seen the movies.

It is almost 25 years since the then Reed Elsevier agreed to acquire Wolters Kluwer for $8.8bn in shares in a deal which would produce a $8bn-revenue leader in worldwide information. The announcement had the added spice of being a decade after fellow Dutch publisher Elsevier had mounted a hostile bid to take over Kluwer which was then rescued by Wolters Samsom. Elsevier had been forced to look for a merger partner in London-based Reed International. But the EU competitions regulator scared the horses and the follow-on Reed-Wolters deal didn’t materialise.

In the quarter century since, the former Reed International and Reed Elsevier (having previously escaped from its manufacturing legacy in print, paper and paint) sold-off its consumer and print media. It became serious about high-value data, subscriptions, transactional media and became a global player. The former UK-focused publisher of newspapers, books, and magazines is one of the world’s leading professional information providers.

Fast forward to 2021 and the renamed RELX has a market cap of €33bn, almost twice that of Wolters Kluwer(WK). But recent results emphasise that size is not everything in the battle to trade normally in abnormal times.

WK announced this week 2020 revenues of €4.6bn with 2% of organic growth. The company, whose subscription revenues (80% of the total) increased by 4%, made operating profit of €1.1bn – up 5%, with 102% cash conversion. While Covid mainly impacted book sales, 91% of revenues are now digital. The returns to shareholders are good too, with a 15% increase in dividends and a substantial share buyback.

In some ways, RELX’s results two weeks earlier had some of the same satisfaction blended with Covid caution. But RELX was hiding. The giveaway was continual reference to its “three largest business areas” of STM publishing, Risk, and Legal – which enabled it to calculate growth of 2% in revenue and 4% in operating profit. But the company was choosing to exclude the stricken exhibitions division, which had accounted for 15% of operating profit and 19% of revenue in 2019. With exhibitions, RELX revenue and operating profit was down 10% and 17% respectively in 2020.

The Covid impact on events is clear. But Reed Exhibitions, which had losses of £164m in 2020 (compared with £331m profit in 2019) has a special place in the recent history of RELX and its retiring chairman Anthony Habgood who – with CEO Erik Engstrom – has been at the helm for 12 years. Reed Exhibitions once complemented a mighty portfolio of B2B publishing in the UK and US. But those magazines and directories have long gone and the admittedly high-performing exhibitions haven’t looked anything like a core RELX business for years. But the parent company has consistently batted away offers to sell or merge what was the longtime exhibitions world leader, until it was overtaken by Informa in 2018.

Unsolicited offers had valued Reed Exhibitions at £4-5bn, something like the 15 x operating profit that lesser trade show companies were getting in a $30bn market where longterm growth had been almost twice that of the world economy. The valuations were endorsed by trade bidders which claimed to have identified up to £70m of ‘profit improvements’ in a company with many of the world’s best trade shows but also with a long tail of small events and – until recently – some high overheads. But Reed Exhibitions’ organic revenue growth of 5-7% in each of the six years pre-Covid speaks volumes for the quality of the underlying business.

It is not difficult to understand why – until Covid – RELX was reluctant to divest the high-profit, high-growth exhibitions division. But a £4-5bn sale would have eliminated 70% of the RELX net debt. Too late.

What will RELX do now? It is one thing for the parent company to pretend a major activity is strategic because it is successful. But the global exhibitions market may now take years to recover. Here’s why:

  1. Some annual events will have been missing from calendars for two consecutive years.
  2. Many exhibitors and visitors will be experiencing recession.
  3. Digital formats have changed some strategic priorities.
  4. Resumed exhibitions may not match their previous scale and success.

As a result, exhibition organisers (and parent companies) may need to invest in the resurrection of trade shows, notwithstanding the need also to develop new digital services. That’s fine, of course, if events are your core business – but indigestible if (like RELX) you are much keener to invest elsewhere

Those are the calculations that RELX must now make, especially given its stated expectation that exhibitions will be virtually back to normal for the second half of 2021. The company has told investors it expects to stage some 75% of its 550 exhibitions in 2021. This now seems highly optimistic, given the fact that the first quarter has seen little activity outside Japan and China, the second quarter is likely to be “Asia only”, and any non-Asia events will be confined only to the second half.

In the first five months of 2021, Reed Exhibitions will be able to trade only in China (since June 2020), Japan (since August), and India (since Feb 2021), which may equate to around 50-60 trade shows totalling some £60m. If those calculations are accurate, it would be difficult to achieve anything like the 75% of trade shows that investors had been expecting in 2021.

Even the most ‘normal’ resumed shows may miss out on much of their international business in 2021 and even 2022. And many of Reed’s most profitable exhibitions take place not in Asia but in the US, France, Germany, Austria, and the UK.

That is why at least some of the private equity companies which once tried to persuade RELX to sell Reed Exhibitions will be making contact again, albeit with lower prices. The smart money may be on a merger with the neatly complementary exhibitions portfolio of Informa. An all-share deal looks more attractive than ever, with or without any tie-up of both companies’ STM publishing.

But any de-merger discussions will inevitably have investors weighing in on the potential rewards of a break-up of RELX as a whole. Such calculations may be driven by the valuation of its fast-growing Risk & Business Analytics (RBA) division which last year had revenue of £2.4bn and EBITDA of £1bn.

RBA, which claims to be “the world’s leading digital identity network”, last year accounted for 43% of RELX operating profit and 34% of its revenue. But the key to its value may be the 22x enterprise value/ EBITDA multiple of the listed US company Verisk Analytics Inc. This indicates that RBA may be worth some $20bn – or about 50% of the current RELX enterprise value. The break-up arithmetic may be almost as attractive as it was 12 months ago when Citi presented the case for RELX being worth at least 40% more than its share price.

Thoughts of RELX break-up may also prompt consideration of combining RBA and DMGT’s Risk Management Solutions.

Wolters Kluwer might be interested in acquiring RELX’s £1.6bn-revenue legal division. But beyond its relatively strong performance during Covid, the intriguing thing about the Dutch company is that you have to search hard to read anything much about Nancy McKinstry who has been its Chairman and CEO since 2003. The financial reporting is comprehensive, transparent and unfussy. But the CEO is quiet.

The US-born McKinstry has worked for WK for most of her career and has been a highly effective advocate for gender equality in business leadership in the Netherlands and across the world. But there aren’t many headlines or much drama, just solid performance and investor support for a group that has strong operations in Health, Government Risk & Compliance, Legal, and Tax & Accounting (30% of revenue). Some 60% of revenue comes from North America and most of the rest from Europe.

WK’s solid performance has seen revenue / operating profit of some €4.5bn / €1bn in each of the last five years. But the steady numbers disguise the elusive pedalling-hard combination of investment in systems, tight management of borrowing – and good returns for shareholders.

But the focus is now on RELX.

What will it do about exhibitions? And could a JV with Informa (or the Blackstone-owned Clarion Events?) prompt a break-up of RELX? Even in tough times, there are many options.

Whatever the answers, will the under-stated Nancy McKinstry be a participant or mere spectator in what could become Europe’s biggest M&A in 2021-2? For students of the eventful 126-year history of Reed / RELX, it seems to be time for another round of marriage and divorce.

Additional analysis by Mark Parsons, of Events Intelligence