McGraw-Hill’s latest spinoff plans prove breaking up is not so hard to do, Jim Cramer said Thursday on CNBC's "Mad Money."
The New York City-based company — which is both the parent firm of ratings agency Standard & Poor’s and a major textbook publishing service — announced in September 2011 that it would be splitting apart into two separate public companies.
“To me, this is exactly the kind of breakup that unlocks value,” Cramer said, adding that the two firms will be much more appealing to Wall Street apart than they ever were together. By the end of 2012, McGraw-Hill will have decoupled its businesses to become both a growth stock — McGraw-Hill Financial and a value stock — McGraw-Hill Education.
Right now, McGraw-Hill’s main appeal stems from several key factors: its willingness to protect its shareholders, its “excellent management” and its individual sector strength.
The company remains one of the most “shareholder-friendly” firms out there, Cramer said. And McGraw-Hill’s management has never shied away from making the tough calls during hard times, such as when the firm opted to sell BusinessWeek to Bloomberg for “next to nothing” when the magazine faltered back in 2009.
The “Mad Money” host honed in on the firm’s financial side, forecasting a higher valuation for the firm once the breakup is completed. “It’s a terrific time to be in the ratings agency game,” he said, “as companies are eager to refinance and issue debt at low rates while paying S&P for their opinion.” And despite S&P’s many critics, the litigation has left the firm “totally unscathed.”
And while the textbook business may not be booming, Cramer cited a fresh set of future legislation that should notch demand higher for textbooks by 2014. The company has also teamed up with Apple to release textbooks for the iPad.
But most importantly, he said, the split will make it simpler to determine what each company is really worth. Cramer said the sum of the parts could amount to more than $58 a share – 34 percent higher than where the still-whole company is trading right now. “There’s a ton of hidden value to unlock, and it matters because lately this stock’s been getting hit hard.”
The bottom line: Breakups aren’t always a bad thing, Cramer said. And the McGraw-Hill split into a growth financial services firm and a value-oriented textbook firm could be just what the company’s shareholders ordered.
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When this story was published, Cramer’s charitable trust owned Apple.
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