SEC Form 6-K Summary: Reed International P.L.C. and Elsevier NV
Business Context and Reporting Period
This joint Form 6-K, filed on July 27, 2001, by Reed International P.L.C. and Elsevier NV (collectively "Reed Elsevier"), provides unaudited pro forma financial information. The filing details the financial impact of three simultaneous transactions assumed to have occurred on January 1, 2000, or December 31, 2000:
- Acquisition of Harcourt General, Inc. for $4.45 billion.
- On-sale of Harcourt's Higher Education and Corporate/Professional Services businesses to The Thomson Corporation for pre-tax proceeds of $2.06 billion.
- Issuance of a multi-currency global bond offering (the "Notes") with net proceeds of approximately $1.528 billion.
The pro forma data reflects the retention of Harcourt's Scientific, Technical, and Medical (STM) and U.S. K-12 businesses, valued at approximately $4.5 billion net of debt and taxes.
Key Financial Metrics (Pro Forma Year Ended Dec 31, 2000)
The following metrics represent the combined pro forma results for Reed Elsevier under U.K. and Dutch GAAP, with U.S. dollar translations provided for convenience.
| Metric | Amount (GBP Millions) | Amount (USD Millions) |
|---|---|---|
| Turnover | 4,916 | 6,920 |
| Operating Profit | 388 | 546 |
| Profit Attributable to Shareholders | 50 | 70 |
| Adjusted Operating Profit | 1,047 | 1,474 |
| Adjusted Profit Attributable | 595 | 838 |
| Net Debt | (3,233) | (4,551) |
| Shareholders' Funds | 3,041 | 4,281 |
Note: Net debt is defined as external borrowings less cash and short-term investments. Adjusted figures exclude amortization of goodwill, intangible assets, and exceptional items.
Material Changes and Transaction Details
The pro forma statements reflect significant structural changes compared to historical results:
- Acquisition Accounting: The transaction is accounted for using the acquisition method (U.K./Dutch GAAP) and purchase method (U.S. GAAP). Goodwill and intangible assets arising from the retained Harcourt businesses are amortized over a 40-year period, an increase from the previous 20-year maximum.
- Debt Structure: The company raised $1.528 billion in net proceeds from the sale of Notes (6.125% due 2006, 6.750% due 2011, and 5.750% Euro Notes due 2008). These proceeds were applied to reduce short-term borrowings used to fund the acquisition.
- Asset Composition: The balance sheet reflects the addition of Harcourt's STM and K-12 assets and the removal of the on-sold Higher Education and Corporate Services businesses.
Guidance, Risks, and Accounting Differences
Management Commentary and Outlook: The filing explicitly states that the pro forma information is for illustrative purposes only and does not represent actual results or future operating performance. It does not account for expected synergies or integration costs.
Accounting Differences (U.K./Dutch vs. U.S. GAAP): Significant reconciling items exist between the reported figures and U.S. GAAP:
- Goodwill: Under U.S. GAAP (SFAS 142), goodwill is not amortized, whereas U.K./Dutch GAAP requires amortization. This results in a higher pro forma net income under U.S. GAAP (£90 million vs. £50 million).
- Deferred Taxation: U.S. GAAP recognizes deferred tax liabilities on acquired intangible assets that are not recognized under the timing difference approach of U.K./Dutch GAAP.
- Pensions: Differences in actuarial assumptions and asset valuation methods affect reported pension costs.
Risks: The filing notes that the final allocation of purchase consideration is subject to completion of valuation studies within one year. Additionally, the pro forma data assumes a specific interest rate environment; a one-eighth percent increase in rates would increase interest expense by £0.9 million.
Investor Verification Checklist
- Verify the final allocation of the $4.45 billion purchase price, specifically the valuation of goodwill and intangible assets, which is currently preliminary.
- Confirm the actual integration costs and synergy realization, which are excluded from the pro forma figures.
- Review the reconciliation to U.S. GAAP to understand the impact of non-amortization of goodwill on future earnings reports.
- Monitor the refinancing of short-term borrowings with the long-term Notes and the resulting impact on the blended financing rate.
- Assess the sensitivity of net interest expense to changes in market interest rates, given the significant debt load.