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June 18, 2008

UBM-Informa talks collapse as the princes of private equity wave silly money under Mr Rigby’s nose

By Peter Kirwan MM blog

So Informa and United Business Media won’t be getting hitched after all.

Talks collapsed last night after the market closed. UBM put out a statement first, suggesting that a deal in shareholders’ best interests had proved impossible to negotiate.

Then Informa followed up, throwing in the added information that it had received “a further approach from a third party that may or may not lead to a takeover offer in cash”.

That approach seems to have come from Providence Equity Partners (PEP). According to Neil Hume at FT Alphaville, PEP made an approach to Derek Mapp, the chairman of Informa yesterday, offering an indicative price of between 520p and 550p.

This would have been enough to embolden Informa — and break UBM’s bid, which was already undermined by the way in which investors had bid up Informa’s shares.

Between 8 June, when news of the talks was leaked, and yesterday, Informa’s share price rose steadily from 386p to 470p. To do the deal, UBM would have needed to bid at least 500p.

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On 6 June, Informa was valued at £1.6bn. By yesterday, the market’s valuation had shot up to £2bn. At 500p, the company would have been valued at £2.12bn

Informa’s rising value created a problem for UBM. Under chief executive David Levin, UBM requires that its acquisitions deliver a post-tax return of at least 8% in Year 1.

After buying Informa for £2.12bn — plus the $1.24bn required to settle its debts — UBM would have needed the company to produce post-tax profits of at least £270m in 2009.

For 2009, Informa is likely to deliver post-tax profits of under £170m. Even after adding into the equation cost cuts (or synergies) of £30m to £50m, the deal was always going to be a goner at 500p.

Predictably, the Telegraph is suggesting that the deal was called off because of an “irreconcilable difference between the companies’ relative share price”.

At the Times, Amanda Anthony also suggests that some UBM shareholders were concerned about Informa’s debts.

In retrospect, UBM’s interest in Informa feels like an opportunistic episode triggered by collapsing share prices — and overcooked fears about Informa’s debts.

Who comes out of it better? For the moment, Informa, which has some distracting bait for the sharks in the form of an “approach” from an alternative bidder. For Peter Rigby, the company’s chairman, the dalliance with UBM has worked out well.

He has held on to his job, watched Informa’s share price rise sharply and used UBM to elicit interest from private equity funds (which was probably what he wanted in the first place).

There’s only one cloud on the horizon. At the weekend, apparently unprompted, Rigby made a reference to the possibility that Informa might be broken up into smaller parts and sold off.

This morning, the same suggestion re-surfaced, courtesy of several analysts, including Paul Richards from Numis Securities.

“As a business built by acquisition/merger, Informa could be dismantled into more manageable pieces relatively easily in our view.”

A break-up would serve only one purpose: it would allow a private equity bidder to bid high (possibly as high as 530p) in the hope of recouping some cash by selling off Informa’s specialist businesses on a piecemeal basis.

For UBM, one possible result of an episode like this is renewed market scrutiny. Questions will now be asked about the company’s strategy. Does UBM have another bid target in mind? If not, why not?

Morgan Stanley isn’t alone in recommending UBM as one of the market’s “safe” and “interesting” stocks. That said, David Levin, UBM’s cerebral chief executive, will need to move quickly to quell inevitable post-bid murmurings about quality of earnings and lack of ambition.

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