Under-fire McGraw-Hill builds war chest

McGraw-Hill, which faces US$5 billion in fines for allegedly misleading bondholders, is fortifying its own investors with US$1.4 billion in net cash and what may be the fastest profit growth since 2007.

After the company, which owns credit rating agency Standard & Poor's, divests its education unit, adjusted earnings at the remaining division, to be named McGraw Hill Financial, will be US$3.10 to US$3.20 a share this year, the firm forecast on Tuesday, up at least 13 per cent.

The New York-based business will retire about US$457 million of short-term debt with the US$1.9 billion it gets from Apollo Global Management from the sale.

McGraw-Hill is focusing on higher-margin businesses including its S&P bond-rating unit, while repurchasing stock to raise earnings per share. It will swing to a net cash position from about US$495 million of debt.

"The education unit was an albatross and wasn't getting better any time soon," said Ed Atorino, a media analyst at Benchmark in New York, who forecasts McGraw-Hill stock will outperform its peers over the next six to 12 months. "They're going to be awash in cash" after the sale, he said.

S&P, the world's largest credit ratings company, will generate about half the company's revenue. The unit is at the centre of the Justice Department's lawsuit, which alleges it inflated ratings on mortgage-backed securities and collateralised debt obligations to win business from Wall Street banks.