McGraw Hill Financial (MHFI) is exploring options for its J.D. Power & Associates business as the data research giant narrows its focus to financial information, a transition that may go much smoother if the marketing services unit fetches the roughly $1 billion price tag company followers believe is possible.
McGraw Hill CFO Jack Callahan said Tuesday during an earnings call with investors his company is currently in the beginning of the review process and that it anticipates reaching out to potential buyers in the coming weeks.
"We have no gun to our head to get it done overnight, but at the same time, we don't want this process to linger," he said during the call. "So we hope to move it forward as we get in the early part of next year."
McGraw Hill CEO and President Doug Peterson said during the call that as the $26.1 billion market-capitalization company increases its focus on capital and commodity markets, J.D. Power could be more valuable to another owner as "part of a market research and consumer analytics platform" than it could be remaining in McGraw Hill portfolio.
McGraw Hill first revealed on Oct. 30 that the company will commence a process to explore strategic options for J.D. Power and that it has retained Morgan Stanley as its financial adviser. J.D. Power is estimated to have annual revenues approaching $350 million in 2016, McGraw Hill said in the announcement.
Ken Sonenclar, managing director at investment bank DeSilva & Phillips, explained that J.D. Power isn't particularly aligned with McGraw Hill's overall strategy of focusing on financial data.
He estimated that with approximately $350 million in annual revenue, J.D. Power would have about a 25% Ebitda margin, or around $80 million to $85 million in Ebitda.
Assets of that magnitude, plus a brand in a niche market, would command a multiple of at least 10 to 12 times Ebitda, Sonenclar explained, pegging a likely price tag for the target to be in the range of $800 million and $1 billion.
"The most likely buyer is a private equity firm. It's a significant size business," he said. "If you look at who are in market research industry, you don't have that many big players."
Sonenclar pointed to players such as WPP (WPPGY) and Nielsen Holdings, but wondered whether the handful of strategics would be willing to swallow an asset of such scale.
"It's not unfair to say that this business could probably slim down, and a smart private equity player could take a hard look at this business, which certainly to me is a fabulous asset," he went on.
He added that J.D. Power is exploring options at a time when everything about the customer experience has become explosive.
Doug Arthur, managing director at Huber Research Partners, explained that McGraw Hill likely feels that J.D. Power is a good asset but lacks the growth rate that the company wants. "The new McGraw Hill is trying to fashion higher-growth, higher-margin portfolio businesses," Arthur explained.
He agreed that a price tag of $1 billion for J.D. Power would be a logical one, but did not comment on whether the likely buyer would be a financial sponsor or a strategic.
McGraw Hill did shell out more than $2 billion to purchase SNL Financial earlier this year from New Mountain Capital in a bold move to further diversify its data offerings to the financial services industry, a transaction for which some company followers, including Arthur, believe McGraw Hill overpaid.
The SNL Financial acquisition came several months after it sold McGraw Hill Construction to private equity firm Symphony Technology Group in 2014. Since then, McGraw Hill Construction has rebranded itself as Dodge Data & Analytics and has sold its construction-related publications to BNP Media.
In 2012, McGraw Hill sold its education business, McGraw-Hill Education, to Apollo Global Management (APO) for $2.5 billion. Apollo revealed its plans in September to take McGraw-Hill Education public.
Today, McGraw Hill Financial operates four main segments: Standard & Poor's rating services, S&P Capital IQ, S&P Dow Jones Indices and Commodities & Commercial. J.D. Power falls under the C&C division.
McGraw Hill reported earnings Tuesday, posting a 5% increase in revenue for the third quarter to $1.32 billion. Adjusted net income also climbed up 16% to $325 million for the period.
Shares of McGraw Hill currently trade around $97.27 after closing Tuesday up 5.9% at $97.71. McGraw Hill is up around 9.3% for the year to date. Officials with McGraw Hill didn't return requests for comment Tuesday.