The Basics
The Springer Nature Group is the result of the 2015 merger of Springer Science+Business Media with the majority of the businesses owned by Holtzbrinck and operating as part of McMillan Science and Education. The company has two main shareholders: Holtzbrinck Group (a German family-owned publisher) which has 53% of the shares, and BC Partners (a European private equity firm) which has the balance (except for a small stake still owned by the Government of Singapore, which owned Springer before its sale to BC Partners). The Springer/Nature merger was quite expensive: BC Partners acquired Springer in 2013 for an estimated €3.1 billion and then agreed to give Holtzbrinck 53% of the equity of the combined entity. If by January 2015, when the Nature merger was announced, BC Partners valued its stake in Springer at least equally to its original investment, this means that Nature Publishing Group was valued at €3.5 billion, underlying the unique quality of its assets.
Springer Nature Group is the single largest publisher of scholarly journals, with about 3,000 titles. In terms of revenues, however, Springer is second to Elsevier with estimated journal revenues of €1.150/$1.333 billion (30% of Springer’s reported 2017 revenues of €1.64/$1.9 billion, in fact, derive from the sale of books). Its operating profit margin of 22.8% is also well below Elsevier’s 36.8%.
Historically, Nature Publishing Group, the publisher of Nature, has been perceived as the highest quality group of scholarly journals. Springer, on the other hand, was always viewed as having a good but not outstanding portfolio of journals. Springer was the first publisher to embrace OA through its acquisition of BioMed Central in 2008. At the time, the deal was viewed as an indication that OA would quickly gain traction among leading publishers. In the following years, however, Springer turned lukewarm on OA, and former CEO Derk Haank (who retired at the end of 2017) was publicly indicating by 2011 that he believed that the collection subscription (aka “big deal”) is “the best invention since sliced bread”. Regardless of whether one agrees with this statement, it is a good indication of the conservative and tough, business- oriented culture of Springer.
What is the strategy of Springer Nature?
Springer Nature under Derk Haank and its private equity owners has pursued a very traditional strategy, based on extracting synergies from industry consolidation. The merger with Nature Publishing Group gave Springer another large bucket of costs to cut on top of the relentless pressure on costs exercised by Haank over the years. It also absorbed a significant amount of management time, leaving little or no space for comprehensive initiatives on academic data and analytical services. In fact, its only recent noteworthy deal in research outside of the journal space has been lifting its stake in Research Square (a company that offers language and manuscript editing and translation services to authors of scientific content) to 60% in February 2018.
Springer’s reluctance to enter the data analytics business may also be driven by the €3/$3.47 billion debt of the company. This debt equals about 5.5x EBITDA (as a comparison, RELX Group aims to keep its Net Debt/EBITDA ratio between 2.5x and 3x and was at 2.5x at the interim six months 2018 results), a ratio that is dangerously close to becoming unsustainable. Investors view a Net Debt/EBITDA ratio of 6x or higher as dangerous, particularly at a time when interest rates may start to rise. Management will have probably tried to lengthen maturities and convert debt to fixed rate after the failed IPO (which was meant to raise €1.2/$1.4 billion, earmarked for debt reduction). Nonetheless, it is difficult to imagine that, in the current environment, Springer could afford to shift its strategy to pursuing an Elsevier-like data analytics strategy, which would imply additional investments and losses for some time to come.
Why did the IPO fail?
Very simply, the IPO of Springer Nature failed because of a valuation issue. The price range offered to investors (€10.50 to €14.50/share, equal to $12.17 to $16.80/share) implied a valuation of 8.8 to 12.2 times 2019 forecasted EBITDA. This assumes that 2019 EBITDA will come in at about €600/$695 million (an almost 10% increase over the €551/$639 million EBITDA recorded in 2017).
The upper end of this range would have been expensive under almost all circumstances, and even the lower end requires significant confidence that the business will continue to generate adequate revenue and earnings growth for many years to come. In the short term, this is a reasonable assumption, as earnings of scholarly publishers tend to have very low volatility because most customers sign multi-year contracts with pre-defined price inflation terms. On the other hand, there are so many things that could go wrong with this model in the future (in particular because of the rising potential of a shift to Open Access), leading investors to have little faith in the value of forecasted long term earnings.
Our interviews indicate that some investors expected the stock to fall at least another 10-15% after trading started following the IPO, effectively allowing them to buy it at a much more attractive valuation, in part because of the rising stream of negative news coming from both Springer and Elsevier on the negotiations of new subscriptions with leading European and North American customers.
Going forward…
The board and management team of Springer Nature are now in a tight spot. It looks difficult to get anything close to the valuation they expect by just running the business as they have to date. Assuming investors will not accept a valuation higher than 7x EBITDA, EBITDA must rise by 20% (+€120/$139 million) to €720/$835 million to achieve the lower end of the valuation range, and by about 75% (+€450/$522 million) to €1.050/$1217 billion to achieve the higher end of the range. After years of cost cutting, there is probably limited scope to radically lower the cost structure to achieve this goal: the company has about €1/$1.16 billion in operating costs (before interest, taxes, depreciation, and amortization), so even cutting €120/$140 million requires taking out another 10% of expenditures (and over 40% to take out €450/$522 million).
Alternatively, management could try to lift the growth rate of the business. This option, however, looks difficult to execute for two reasons. As we discussed earlier, the company is saddled with significant debt (€3 billion) and this leaves little scope to invest in growth initiatives. In addition, some of the possible growth initiatives would add to the losses in the near term, further clouding the prospect of trying to IPO the business in 2019 or 2020. It is widely thought, for example, that Holtzbrinck did not include Digital Science into the assets of Springer Nature to avoid saddling it with the estimated €10 to 20 million ($11.6 to 23.2 million) in annual losses which Digital Science used to incur at the time (per our interviews – Holtzbrinck does not disclose numbers). Recently, however, Digital Science revenues are rising at a much faster pace (again, per our interviews), and this improvement in performance may lead to reconsideration over whether it should have a future role within Springer Nature (and, in fact, become a key element of the investment case in Springer Nature).
In the end, BC Partners, like all private equity (PE) firms, wants a liquidity event that will allow it to exit the investment. In many cases, PE firms do have the recourse of distributing to their investors the holdings in acquired assets, but this outcome is unpopular with investors and becomes a black mark on a PE firm. The size of Springer Nature may preclude a sale to another scholarly publisher on anti-trust concerns (although, in recent years, regulators have accepted mergers in sectors of the media industry which are even more concentrated, like recorded music). It seems unlikely that a traditional media company would want to step in and own a minority stake in a scholarly publisher. This leaves the Holtzbrinck family or an IPO as the only long term exits for BC Partners. The first course would require a significant effort by Holtzbrinck, who may have to part with other assets (or take a significant debt) to buy out BC Partners – both options appear unpalatable. An IPO remains, therefore, the most logical outcome, but valuation remains a sticky issue, as we have seen. It is also worth noting that the stock market is near its highs, raising the question of what can lift the appetite of investors for this asset. In summary, the timing for an IPO looks increasingly uncertain.
Implications for the academic community
Elsevier is the net winner from the IPO’s failure. Had the IPO succeeded, Springer Nature would have had less debt, more flexibility to pursue growth through investments, and it could have also created an uncomfortable peer in the eyes of investors: a low valuation of Springer Nature would have raised questions on the valuation of RELX Group. In fact, the current RELX Group total market value (about £40.7/$53.8 billion, including its Net Debt of £6.2/$8.2 billion at the end of June 2018) implies a valuation of 14.5x the estimated 2018 EBITDA of £2.8/$3.7 billion. Since RELX Group derived about 40% of its 2017 operating profit from Elsevier, even a top of the range 12.2x valuation for Springer Nature would have raised a few questions about the RELX valuation – and a Springer Nature valuation at the bottom of the range at 8.8x much more so. Finally, a publicly listed Springer Nature would have provided a quarterly score card on the performance of Elsevier in terms of revenue growth and margins expansion – and any underperformance would have provided further problems for the management of Elsevier. Instead of facing all these issues, Elsevier stands alone among journal publishers in its strategy of transitioning towards serving the broad academic community on data analytics. Even if Springer Nature does, at some future point, take control of Digital Science, this move will be delayed.
A publicly-listed Springer Nature, with less debt, could have moved towards replicating Elsevier’s strategy, offering a welcome alternative to dealing with Elsevier. This opportunity now looks more remote in time, if at all feasible, leaving Clarivate as the only likely competitor to Elsevier in data analytics going forward.
