The Investment Column: Life not so bad for Reed after all

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The Independent Online
HAVING been jilted at the altar by Wolters Kluwer, Reed Elsevier was yesterday making out that single life isn't so bad after all. To a certain extent, it's right. Although the pounds 18bn marriage would have created a powerful international publishing group, with near-monopolies in key areas such as scientific and legal publishing, even on its own Reed is no weakling.

That said, by failing to close the deal Reed is missing out on tens of millions of pounds worth of "synergies" - code for its ability to squeeze prices for key products even higher. An independent Wolters means more competition in some of Reed's markets and another potential bidder driving up the price of acquisition targets.

Of course, this is no different from the position Reed was in before it announced the merger. So has the fall in its share price - the shares yesterday fell by another 6.5p to 610.5p and are now down 15 per cent from their high in early March - now accounted for that?

Well, perhaps. Adjusting for the strength of sterling and other exceptional items, yesterday's figures showed Reed Elsevier's pre-tax profit rising by 10 per cent to pounds 823m in 1997. However, this includes acquisitions and doesn't count the expense of defusing the Millennium time bomb. That cost Reed pounds 11m last year, and the total bill is likely to reach pounds 75m.

Adjust for these factors, and earnings growth looks fairly ordinary for what is supposed to be an rapidly expanding media business. Much of the blame falls on the Travel Group, which reported a 20 per cent fall in profits as a result of hefty restructuring after Reed uncovered circulation irregularities in the US. Repaying advertisers for overcharging and writing down the value of the business prompted an exceptional writeoff of pounds 401m - as Reed had already announced.

The Travel Group is unlikely to improve much this year. The other parts of the business should continue to forge ahead. Having raised pounds 860m from the sale of its consumer magazines Reed, with net cash on the balance sheet, has plenty of firepower to make acquisitions. Based on the existing businesses alone, however, growth prosects don't exactly set the pulse racing. Brokers forecast profits of pounds 855m, which puts shares in Reed International, Reed Elsevier's UK parent, on a forward p/e ratio of 21. High enough for now.