New York: After the final adventures of Harry, Hermione and Ron, Scholastic Inc. may face an exodus of shareholders if the company doesn’t consider selling itself.
Investors, including Mark Boyar of Boyar Asset Management Inc., say the New York-based publisher should be sold because chief executive officer Richard Robinson—who has run Scholastic since 1975—hasn’t used the windfall from the Harry Potter series, the biggest hit in books in the past decade, to build successful new businesses. Robinson had said on Friday that he has no intention of selling.
As the seventh title in J.K. Rowling’s series about the boy wizard made its debut, shares of Scholastic, the book’s US publisher, were trading at 0.66 times annual sales, compared with 1.04 times sales for rival US book publishers. The shares would be worth more than $50 (Rs2,015) each, or 48% above their current price, if the company were to sell itself, Boyar and Stifel Nicolaus & Co. analyst Drew Crum said.
“This is a very, very valuable business, and it would be worth a lot more to a potential buyer,” said Boyar, president of his New York-based firm, which owned 200,000 Scholastic shares as of March.
Scholastic shares have returned an average of 7.5% a year over the past 10 years through 30 June, versus 13% for the S&P mid-cap index.
Robinson, whose father Maurice founded the company in 1920, “is not a seller”, CFO Maureen O’Connell said. Through its ownership of class A shares, the Robinson family controls four-fifths of Scholastic’s board.
Scholastic’s latest stumble is in its direct-mail business, where subscriber delinquencies are rising. On Thursday, the company reported fourth quarter profit of $40.4 million, or 93 cents a share, missing analysts’ average estimate.
Robinson, 70, said he has a plan to cut the direct-mail unit’s losses by about $20 million this fiscal or exit the business. “We have no intention of selling the company, and we don’t believe our investors need us to sell the company to realize value,” he said.
Publishers typically sell for one to one-and-a-half times revenue, Crum said. “Clearly, the private equity value of Scholastic is much greater than the public value.” Crum declined to speculate on potential buyers.
Scholastic bought the US rights for the Harry Potter series from London-based Bloomsbury Publishing Plc. in 1997. The series brought in $800 million in revenue for Scholastic from the first title’s US publication in September 1998 through the fiscal year that ended this May, Crum said. That amounts to 4.7% of sales over nine fiscal years.
Crum predicts Scholastic will reap another $225 million this fiscal, or 9.4% of $2.4 billion in sales, and 62 cents a share out of $2.79 in profit.
Sales at Scholastic rose from $1.06 billion in fiscal 1998 to $2.18 billion in fiscal 2007, an average of 8.4% a year, according to Bloomberg data. Without the $800 million that the series contributed, Crum says, sales would have grown 8.2% annually. Scholastic plans to print a record 12 million copies of the seventh and final entry in the series, Harry Potter and the Deathly Hallows.
While sales will decrease over time, Scholastic will still get about $10-15 million annually from Harry Potter books for the next three years, driven by special editions, the publicity of two more movies and paperback copies, Crum said.
Children’s publishing provided 53% of Scholastic’s sales last year. Robinson has expanded elsewhere, with programmes that help children read and book fairs. A $200 million share buyback plan, aimed at repurchasing about 14% of the stock, boosted the price in June.
Publishing companies typically have lulls following hits, said Kara Cheseby, a Baltimore-based analyst with T Rowe Price Associates Inc., Scholastic’s largest shareholder with 3.84 million shares as of March. “At times you have big hits and they supplement your business,” Cheseby said. “Harry Potter is just one part of the business.”
Finding another hit won’t be easy. Scholastic’s UK counterpart, Bloomsbury, saw 29% of its stock value vanish in December after a gamble on celebrity biographies and cookbooks for the Christmas season failed to pay off. The shares have dropped an additional 27% year to date.
“The future for the company without Harry Potter is looking dark,” said Henk Potts, an equity strategist at Barclays Wealth in London, who helps manage $185 billion. “Bloomsbury looks set to return to being a small and rather boring publishing company.” Scholastic faces similar challenges.
“What they should really be doing is putting the company up for sale,” Boyar said.
Matt Miller in New York, Mark Herlihy in London and Bill McColl and Tom Contiliano in Chicago contributed to this story.