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Jana Partners Advisee McGraw Hill Third Quarter Profit Falls 3.8% on Poor Bond Market

McGraw Hill (MHP) ‘s third quarter profit fell 3.8&, reports Bloomberg. The culprit? Revenues from McGraw Hill’s two biggest earnings streams – Standard & Poor’s credit ratings and textbooks – dropped, at the same time.

Barry Rosenstein JANA PARTNERS

McGraw Hill’s Revenue Falls Below Analyst Estimates

McGraw Hill’s revenue went from $379.9 million, or $1.23 a share, a year earlier to $365.6 million, or $1.21 a share. Analysts were predicting the company’s revenues to stay level. Evercore Partners analyst Douglas Arthur said, “It’s unusual that their two biggest engines are weak at the same time.” He explained, “In the past, you had better balance, in the sense that when the ratings market slows down, you typically get a big boost in education.”  McGraw Hill lowered its year forecast in the wake of the report. The decline in revenue comes as McGraw-Hill is preparing to divide its business into two distinct entities – McGraw Hill Markets, which would be focused on financial information, and McGraw Hill Education, which would concentrate on publishing educational materials. Jana Partners proposed the plan to boost shareholder value. The transition should be completed by 2012 although the company is pushing for sooner.

The Bond Market’s Impact on McGraw Hill Revenues

McGraw Hill CEO Harold “Terry” McGraw III said that the decrease in Standard & Poor’s credit ratings is primarily due to the fall off in bonds. “The contraction obviously is disappointing, but it’s very, very reflective of current economic conditions,” he said. And the outlook isn’t good. According to Bloomberg, “Revenue at Standard & Poor’s fell 1.8 percent to $409.9 million. The unit makes money by charging companies, cities and banks when they issue bonds, meaning its revenue falls when debt issuance declines.” Considering that “Corporate-bond issuance around the world fell 40 percent to $556.1 billion in the third quarter, down from $919.9 billion in the second quarter,” and the speculation that “The debt markets are not going to get healthy again until we have a stabilization of the situation in Europe,” the bond markets are going to be depressed for some time.