The double-barreled announcement by Reed Elsevier (accompanying its release of preliminary 2007 results) that it a) will acquire risk management data/analytics provider ChoicePoint and b) intends to divest Reed Business Information (RBI), its UKP1.5 billion B2B media division, fits snugly into a narrative of "battening down the hatches" in the face of approaching economic storm clouds.
That is, as the global outlook continues to darken, it is consolidating a leading position in data-driven workflow solutions for insurance, banking, security, and other sectors managing legal and financial risks; and it is removing the most recession-sensitive component of its portfolio. Reed Business never fully recovered from the post-bubble downturn, and its substantial Reed Construction business has obvious exposure to the continuing uncertainties in the real estate industry.
Reed Elsevier (RUK) has always been positioned as a "safe" stock ideal for conservative long-term investors. Not only has its focus on "need-to-know" information proven to drive sustainable growth throughout economic cycles, but its multiple business models (subscription fees in LexisNexis, subscription with some advertising in Elsevier, advertising and exhibitions in RBI, and textbook adoption in the recently-divested Harcourt Education) provided a built-in hedge against the volatility of individual sectors. The success of this strategy can be seen in the way its share price has closely tracked with the S&P Index over the past five years.
One effect of this latest re-shuffling is to increase the similarity of Reed Elsevier's portfolio with that of traditional rival Thomson, which has also divested itself of education and B2B media business over the past few years. The two remain head-to-head in scientific, medical and technical (STM) information, and in legal/tax/risk management. That Thomsons's third leg in financial information, especially after its merger with Reuters, exposes it to a deeply unsettled market sector means that Reed Elsevier should now be seen as strongly preferable as a defensive play in an uncertain environment. Although both LexisNexis (at a previous risk management acquisition, Seisint) and ChoicePoint were victimized by highly-publicized security breaches in 2005, this latest acquisition indicates confidence that sufficient security and record-handling procedures are now in place.
ChoicePoint, whose share price has badly underperformed the market over the past two years, is a logical fit within the LexisNexis Group risk management business unit that now represents over $1.5B in revenue, and the main driver of LNG growth. Whether the sale of RBI can be completed before the full impact of a global recession (if one occurs) has already been reflected in its business value is one of the factors investors will need to ponder. As this is written, RUK is trading up over 7%.