Reed's $1bn cash return fails to impress

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The company had flagged up problems late last year in a part of its education division which operates in the US, but analysts shaved forecasts yesterday for 2006.

Reed shares fell 5 per cent to 525.5p after it reported results for 2005. But Sir Crispin Davis, the chief executive, suggested the shares decline was more to do with short-term investors selling out, after a run-up in the company's stock in recent days.

The company has four divisions: education, business-to-business publishing, legal and scientific/ medical. While the biggest part of the education division, the basal unit which sells core textbooks, did well last year, two smaller units had a poor year - the supplemental and assessment arms.

The supplemental business, which produces remedial materials for children who fall behind at school, was caught out by a change in emphasis by the Bush administration. Under the US government's "No Child Left Behind" initiative, teaching was done phonetically, rather than on the literacy basis that Reed's products provided. In the assessment unit, which provides testing materials, poor customer-relationship skills meant it lost out on key contracts.

Reed said corrective action had been taken to turn the businesses around, including firing some of their management. But its supplemental arm is not expected to show recovery until 2007, it said. Revenues dropped 11 per cent in supplemental and 1 per cent in assessment, detracting from 9 per cent growth in the basal business.

The $1bn will be handed back to shareholders over three years, starting with $350m this year. The return of capital emphasised the strategy Reed had put forward for some time - that there would be no more major acquisitions.

Sir Crispin said the company could fund "bolt-on" deals from debt but "we are not looking for a fifth leg [division]". "With the stronger free cash flow and positive growth outlook, we believe this new programme will enhance shareholder returns while retaining the financial capability to continue to develop the business through both organic and acquisition investment," he said.

Reed reported a 9 per cent jump in underlying profits before tax of £1bn. The legal and scientific/ medical arm had another strong year in 2005, while the business-to-business division also improved.

Turnover was 7 per cent higher at £5.2bn. The company said one-third of its revenues were electronic and delivered over the internet. Sir Crispin said, within three or four years, the figure would probably be more than 50 per cent, and longer term the internet would deliver 75 per cent of Reed's revenues. "That's where... the growth opportunities lie," he said.