Reed in £2bn auction of education arm

Anglo-Dutch group follows lead of rival publishers by deciding to quit troubled sector
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Reed Elsevier has put Harcourt, its large US education business, up for sale in a move which analysts say could net the Anglo-Dutch company between £1.6bn and £2.4bn. The move follows the decision of its rivals Thomson and Wolters Kluwer to quit the troubled sector.

Sir Crispin Davis, chief executive of Reed Elsevier, said that any potential bidders could acquire all three assets to build an education publishing giant by combining Reed's US schools operations with Thomson's US tertiary-level business and Kluwers' European education assets.The company has appointed the investment bank UBS to conduct the sale.

Last night the Irish entrepreneur Barry O'Callaghan, whose educational software company Riverdeep last year completed a £2.6bn reverse takeover of the US schoolbook publisher Houghton Mifflin, was reported to be considering a £2bn bid for Harcourt.

"I suspect we will be talking to a lot of companies," Sir Crispin said.

Pearson, the market leader in US education, is unlikely to bid for Harcourt due to regulatory concerns as the combined business would have a market share of nearly 50 per cent.

Reed said that splitting out Harcourt's science and health operations, the education business was acquired for around $2bn (£1.02bn) five years ago. It currently has a book value of $2.5bn according to the company.

Sir Crispin denied that acquiring Harcourt had been a mistake, saying the company will make a book profit on the deal and has covered its cost of capital.

Lorna Tilbian, an analyst at Numis Securities, said: "Reed should be commended for taking the difficult decision to exit education. In our view, Reed will be a stronger business."

Reed has struggled with its US education business and has recently lost key contracts in testing due to problems marking exams. In November, Reed warned that the business would miss its annual growth target for the second consecutive year. Harcourt's revenue was flat during 2006 while operating profit slipped 20 per cent. The business represented 16 per cent of Reed's revenue during the year but only 11 per cent of profit. Despite the decline, Marc Armour, Reed's chief financial officer, described the flat performance as "extraordinary" given that the overall market declined 6 per cent and close competitor McGraw-Hill recorded a 12 per cent decline in revenue.

Sir Crispin said the company had decided to ditch Harcourt due to the lack of progress in moving the business online. He said that across the company's other divisions - health, legal and business-to-business publishing - the move to digital has been achieved at a rapid rate. In contrast, online accounts for less than 5 per cent of revenue in the education market, a figure that pales in comparison to the 70 per cent achieved in the science market.

"The education market is moving online at a much slower pace than our other businesses and the opportunity is less clear," Sir Crispin said. He said that, over the next few years, Reed expects to derive around 70 per cent of its revenue from digital sources compared to 43 per cent at the end of 2006 if Harcourt is excluded.

Sir Crispin also said that the Harcourt disposal should make Reed's business more cohesive and stable as education has proved a volatile market. He said that only two years ago, Pearson was under pressure due to poor performance in US education, illustrating that volatility. Sir Crispin argued that selling off Harcourt would lessen Reed Elsevier's vulnerability to a private-equity bid for the whole business.

He also dismissed criticism of the company for its organisation of trade shows for the arms industry. "Every nation has the right, if not the need, to defend itself... it is an absolutely sound position for us to take," Sir Crispin said. The Joseph Rowntree Charitable Trust sold its £2m stake in the company this week as a result of the arms trade involvement.