McGraw-Hill, CME Group to form index JV

McGraw-Hill, CME Group to form index JV

Stock Market Predictions

(Global Markets) - McGraw-Hill Cos Inc (MHP.N) and CME Group (CME.O) will form a joint-venture to combine some of Wall Street's most well-known indicators, including the Dow Jones industrial average and the S&P 500.

McGraw-Hill, owner of the S&P Indices, said it will hold a 73 percent stake in the venture and expects the agreement to immediately add "a couple of cents" to its annual earnings.

The deal is the latest step in McGraw-Hill's restructuring of its portfolio of businesses, which also include Standard & Poor's credit ratings, other financial and market information, and textbooks for children and college students. Dissident shareholders have been pushing the company to move faster with the overhaul, charging that the mini-conglomerate has fallen short of its potential.

In September McGraw-Hill outlined plans to split into two separate publicly traded companies, one for its education business and one for its financial and markets businesses.

At the heart of the CME deal is a change in the 30-year relationship between the two companies in which McGraw-Hill has licensed its indexes to the Chicago-based operator of markets in return for per-trade fees. In the joint-venture, McGraw-Hill will take a share of profits from all of CME's stock-related products instead of collecting licensing fees.

CME Group will control 24.4 percent of the joint-venture, while Dow Jones will hold the remaining 2.6 percent stake. CME owns 90 percent of a CME Group/Dow Jones joint venture and News Corp, (NWSA.O) owner of the Dow Jones name, holds the rest.

"It is a big announcement," said Douglas Arthur, an analyst at Evercore Partners. "The index business is very lucrative, big and growing. You are taking two big players and combining them to develop more products and secure long-term relationships."

The companies said the S&P 500 stock index and the Dow Jones industrial average will continue to be maintained separately.

S&P/Dow Jones Indices will have annual revenue of more than $400 million and begin operations in the first half of 2012, the companies said in a statement.

Operating profit margins will be more than 50 percent and annual revenue will rise to more than $435 million in the first year, Terry McGraw, chief executive of McGraw-Hill, said in a conference call with analysts.

McGraw-Hill will report results from the venture as part of its consolidated financials. CME will report its stake as an equity interest. CME said that the deal will not change its 2012 earnings because the revenue it gives up to McGraw-Hill will be offset by not having to pay licensing fees.

The joint-venture will be headed by Alexander Matturri, executive managing director of S&P Indices.

For McGraw-Hill, the new venture should bring more attention from investors to its index business, which is now overshadowed by S&P credit ratings, Arthur said.

Shares of McGraw-Hill and CME were down less than 1 percent in Friday morning trading after the announcement.

McGraw-Hill was advised by BofA Merrill Lynch, Goldman Sachs and Deutsche Bank. Barclays Capital acted as exclusive financial adviser to CME Group.

(Reporting by David Henry in New York and A. Ananthalakshmi in Bangalore; Editing by Joyjeet Das, Viraj Nair and Steve Orlofsky)