Daniel Acker/Bloomberg NewsHarold W. McGraw III, chief executive of McGraw-Hill, has promised an announcement later this year.
6:32 p.m. | Updated
The activist investors pushing for change at McGraw-Hill have finally unveiled their vision for the company. And it is to break up the media conglomerate into four parts.
Jana Partners and the Ontario Teachers Pension Plan, who met with McGraw-Hill’s management for about an hour at the company’s headquarters on Monday, are hoping to cleave the publisher into its components, including an education business and an information and media arm. It would also split Standard Poor’s into its indexes operations and its ratings and financial business, according to a presentation filed with the Securities and Exchange Commission.
The investors’ rationale is that together, the four units share little in common operationally and have different, sometimes conflicting capital needs. At the same time, the high-growth operations like Standard Poor’s have been hidden by the low growth at divisions like publishing and education.
Together, the two investors own a 5.2 percent stake in McGraw-Hill.
Many of Jana’s recommendations are in line with the thinking of research analysts. According to Goldman Sachs, McGraw-Hill is undervalued by 20 percent compared with its peers.
McGraw-Hill was already in the middle of reviewing its portfolio of businesses by the time Jana and the Ontario Teachers fund built up their stake, and Harold W. McGraw III, its chief executive, has said the company expects to make a major announcement in the second half of the year.
It has already hired Goldman Sachs and Evercore Partners to explore potential alternatives and has mandated Morgan Stanley with selling off several television stations. The TV stations are likely to be sold by the end of September, according to a person briefed on the matter.
“McGraw-Hill enjoys an open dialogue with its many shareholders and often gets insights from those discussions,” a McGraw-Hill spokeswoman, Patti Röckenwagner, said in a statement. “While not commenting on specific discussions, McGraw-Hill’s portfolio review is well advanced and expected to result in significant actions in the next few months to accelerate global growth, align appropriate cost structures and build shareholder value.”
Perhaps the most intriguing part of the investors’ plan is the proposed changes for S.P., which includes both the ratings arm and a profitable business that licenses the company’s namesake index of 500 stocks. Jana and the Ontario Teachers fund have recommended that S.P.’s ratings business appoint a “well-known independent oversight figure” to handle government relations, especially in light of the unit’s downgrading the United States’s credit rating to AA+ from AAA.
Privately, McGraw-Hill considers the proposal by Jana and Ontario Teachers a way to throw everything against the wall to see what sticks, according to people briefed on the matter. McGraw-Hill was already exploring spinning off its education business around March, and an announcement could be made in the next month or two, according to a person briefed on the matter.
The company sees that unit as capable of standing on its own, with strong cash flows that nonetheless has been dragging down the rest of the company with its low growth.
But McGraw-Hill believes that creating four separate units would leave none of them, apart from education, capable of standing on their own. Instead, the company is likely to divest noncore assets like some magazine titles. It will also continue initiatives that the investors support, including speeding up a share buyback plan and cutting more costs.
For their part, Jana and Ontario Teachers insist that their approach is genuine and not a negotiating tactic.
Shares in McGraw-Hill have fallen roughly 11 percent since Jana and Ontario Teachers unveiled their stake at the beginning of the month. They closed on Monday at $37.04, up 4 cents for the day.
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