Informa starts clearing the decks ahead of new CEO arrival

A Friday announcement ahead of a sunny weekend and in the middle of the results season and school holidays is usually a good time to dribble out some news that you don’t want attracting too much attention. So today we have the announcement by Informa that it is dumping 5 of its training businesses for between £104-113m (contingent of future returns), albeit with approx £41m ($65m) of this provided by Informa with a loan at only 1% (at least for the first 2 years).

So what are the valuation metrics behind this sale. The businesses made £14.8m of EBITA last year on revenues of £122m, so an EV/REVS multiple of 0.9x for a 12% margin. The exit EBITA yield of between 13-14% meanwhile should provide a good cash flow positive enhancement for the PE buyers (Provident – no kid!), particularly given that around 40% of the purchase price is being funded by the 1% loan from Informa itself (OMG how desperate are these guys!) .  Even assuming a possible 100% EBITA to operating cash flow conversion and a 30% normalised tax rate and the exit Op FCF yield (post tax) is still a whopping 9-10%. Not bad for Provident, although it would still need the business to be able to generate trend growth of at least +1% pa. Perhaps Informa knows a little more about the prospects.  It certainly going to take a sizable hit on its balance sheet as these businesses were sitting on the books at £226m, so expect a -£22m impairment.

While markets are being trained by financial repression to go for yield, it is good to see that returns are still defined by growth and risk.  Informa, for whatever reason, has now decided to kick a low growth/quality business out of the door and take the earnings dilution hit because it understands the valuation issues.  One has to wonder however given the stalled organic growth across the growth how many more such businesses may remain in the portfolio and whether the valuation for the group as a whole should be parameterised by its ability to deliver on this implied growth.

Without comment or recommendation is some possible pertinent analysis of implied growth ratings.