Debt leaves Reed a lot of digging to do

July 30, 2009

CHINA-COAL/    Crispin Davis wanted to bolster Reed Elsevier’s risk management business when as chief executive he spent $4.1 billion on ChoicePoint.
    Last year’s acquisition was not a bad one — it’s a ray of light in Thursday’s otherwise largely depressing results for his successor Ian Smith — but the debt taken on to fund the deal is looming over him after the failure to sell the RBI magazines business.
    Instead, he has been forced to raise around $1.65 billion in a large, unpopular share placing to keep on top of the $8.4 billion debt pile. A failure of risk management, then. It suddenly seems a long time since Reed handed some $4 billion from the sale of its education business back to shareholders at the beginning of 2008.
    Reed is not alone in having to take such drastic action — drinks can maker Rexam needed a rights issue to keep the credit markets onside — but the 15 percent fall in Reed’s shares reflects the nasty surprise.
    Reed and its advisers can expect some flak from the Association of British Insurers (ABI) which hates these big share placings because they threaten the first-refusal rights of existing shareholders.
    Reed has stretched the 10 percent new share concession to the limit, adding 9.9 percent to its existing issued capital.
    It protests that debt repayments are comfortably far into the future, but the move still smacks of “needs must” and Reed admits that its credit metrics are “too stretched” given the economy and its business cycle.
    Add that to a retreat from its profit guidance for the year, and it’s no wonder shareholders are spooked.

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