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Harcourt on the Block
Jim Milliot -- 6/26/00
Sale of the publisher could fetch $5 billion

In a surprise announcement last week, Harcourt General said that it had hired Goldman, Sachs & Co. to explore the publisher's strategic options, including the possibility of selling the company. Analysts said the move was likely prompted by the belief among Harcourt's management that the company's shares are undervalued--the same rationale Borders Group gave when it said earlier this year that it was looking at its various strategic options. Indeed, after Harcourt's announcement on June 19, its stock jumped 30.5% to $54.81 and closed at $55.81 on June 22.

With sales for the fiscal year ended October 31, 1999, of $2.14 billion and a market cap of $4 billion, Harcourt should bring about $5 billion, analysts said. Pearson paid about 2.5 times sales for Simon & Schuster's professional and education divisions; Harcourt's $5 billion price tag would represent a multiple of approximately 2.3 times sales. Harcourt General, then known as General Cinema, acquired Harcourt in 1991 for $1.5 billion.

Harcourt is a major player in the educational market, where it had sales of $947.5 million in fiscal 1999--$581.5 million in elhi sales and $366 million from its higher education group--and in the professional market, where sales last year totaled $697 million and where it is strongest in the scientific, technical and medical fields.

Among the potential bidders for Harcourt are two of the runnersup in the battle to acquire S&S's educational and professional businesses, Houghton Mifflin and Michael Milken's Knowledge Universe. The acquisition of Harcourt would also give Bertelsmann its long-sought-after entrance into the American professional publishing market. One observer speculated that Bertelsmann and HM could team up, with Bertelsmann acquiring the professional assets while HM takes home the elhi and college segments. Thomson Corp., which is in the process of divesting its newspaper operations, is also considered a possible bidder, although it has focused its attention on the legal and college markets. Antitrust concerns could keep the nation's other large educational publishers, McGraw-Hill Cos. and Pearson, from bidding.

In remarks accompanying the release of its second-quarter results, Robert Smith and Brian Knez, Harcourt's co-CEOs, said early signs point toward the company's educational program exceeding its original targets, and the two men expect a strong performance for the full year. For the first six months of the year, revenues rose 6.1%, to $813.2 million, with the company's professional publishing group turning in the best performance. Operating loss in the period was $73.6 million, compared to $43.1 million in the first half of fiscal 2000, a figure that includes earnings of $28.6 million from its discontinued specialty-retailing operations.
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