Silver Lake and Warburg Pincus have agreed to buy financial data provider Interactive Data (IDC) for $3.4 billion in cash, including a $2 billion payment to majority owner Pearson which it will use to expand.
Pearson — which owns the Financial Times, Penguin Books and the world's biggest education business — said it would use the proceeds from the sale of its most profitable unit to accelerate its expansion through bolt-on acquisitions.
The sale of IDC to the two private equity firms is the biggest leveraged buyout so far this year.
"Pearson and Interactive Data have extensive growth opportunities and ambitious expansion plans," Pearson Chief Executive Marjorie Scardino said in a statement.
"We believe this transaction will give both companies greater focus and opportunity to invest more in their strong market positions," she added.
Analyst Alex DeGroote of brokerage Panmure said: "The key point from Pearson's point of view is that the money doesn't go back to shareholders."
Panmure said that "ordinarily when you do a transformational deal like this, selling 15 percent of your market cap, you'd give something back."
Pearson said it would look for bolt-on acquisitions with a particular focus on technology and services that would complement its international, consumer and professional-education businesses.
It has in the last year bought small and medium-sized companies to expand its education operations in India and China.
Analyst Sam Hart of Charles Stanley Research wrote in a note: "The sale of the stake may lead to some increase in earnings volatility for Pearson, as IDC's profitability was relatively predictable."
"The sale, however, is strategically sensible, as there are few obvious synergies between IDC and other parts of Pearson."
IDC contributed 484 million pounds ($737 million) in sales and 148 million pounds in operating profit to Pearson in 2009, representing 9 percent of sales and 17 percent of profits. Its 31 percent margin was the highest of Pearson's businesses.
Pearson last week issued a trading update in which it said it was confident underlying profit would grow this year after first-quarter revenues rose 12 percent at constant currencies and all parts of the company started the year well.
IDC — which provides reference data, markets pricing and trading infrastructure services to customers including mutual funds, asset managers and banks — said its new owners were committed to supporting its global expansion.
It had announced a strategic review in January and was being advised by Goldman Sachs.
Silver Lake and Warburg Pincus beat bidding groups that sources have told Reuters included Kohlberg Kravis Robert and CVC Capital Partners, and Bain Capital and Advent International.
A source familiar with the situation had told Reuters on Sunday that Warburg Pincus and Silver Lake were close to buying IDC for about $3.1 billion.
Tuesday's deal values IDC at 24 times expected 2010 earnings, according to Thomson Reuters StarMine estimates. That compares with an average trading multiple of 27 for U.S. specialty investment services, according to Reuters data.
Thomson Reuters, which sells investment information and news, trades at 21 times 2010 earnings. Chief Executive Tom Glocer told Reuters the company had looked at IDC but had decided against buying it.
"We've been doing quite well competitively, and this is just one of those times where we think it makes more sense not to spend the three billion-odd dollars that it would have taken to buy it, but instead to just keep investing in our business."
"It's a very nice valuation, read across for our enterprise information business," added Glocer. Thomson Reuters earlier reported a lower quarterly profit, reflecting the lingering effects of the financial crisis on its clients.
McGraw-Hill, owner of the Standard & Poor's ratings agency and publisher of U.S. textbooks, trades at 13 times 2010 earnings. Sources briefed on the matter told Reuters last month that McGraw-Hill was dropping out of the IDC auction.
A source familiar with the situation said on Tuesday private-equity firm Hellman & Friedman had pulled out of the Silver Lake-Warburg Pincus consortium about a week ago because they felt the price was getting too high.
The transaction is fully financed by a combination of equity from the buyers and debt financing from Bank of America Merrill Lynch, Barclays, Credit Suisse and UBS, Pearson said.
Credit Suisse, Barclays Capital, Morgan Stanley and UBS were financial advisers to the buyers.
The deal is expected to close by the end of the third quarter, subject to regulatory and other approvals.
IDC shareholders will receive $33.86 per share, a premium of about 33 percent over the closing share price on January 14, the last trading day before IDC announced its board was reviewing strategic alternatives.
Shares in IDC, which grew out of a company Pearson founded decades ago that merged with Nasdaq-listed Data Broadcasting Corp in 2000, closed at $32.99 on Monday.
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