UPDATE 3-MSCI to sell proxy advisory firm ISS for $364 million

Tue Mar 18, 2014 5:03pm EDT

* MSCI put Maryland unit up for sale in October

* ISS president: no layoffs planned (Adds comments by ISS president)

By Neha Dimri and Ross Kerber

March 18 (Reuters) - Stock market index provider MSCI Inc said it would sell influential governance unit Institutional Shareholder Services (ISS) to private equity firm Vestar Capital Partners for $364 million to focus on its risk investment products and services business.

By putting the unit under private ownership the deal could resolve some awkward situations for MSCI and for ISS. Both have faced criticism from companies and trade groups like the U.S. Chamber of Commerce on areas including the methodologies used by ISS in recommending votes on the election of corporate directors, executive pay and other touchy matters.

MSCI said in October that it was exploring the sale of ISS, which had been through a series of owners before MSCI bought it in 2010.

No layoffs will result from the deal among the roughly 700 employees of Rockville, Maryland-based ISS, said unit president Gary Retelny in a telephone interview.

He will remain at the company with other executives. The deal is expected to close within three months, MSCI said, and will help ISS conduct business, Retelny said.

"The new prospective owners understand what the business of ISS is, what issues matter, and that ISS always needs to provide independent, unbiased advice. That is sacrosanct," he said.

MSCI's shares have gained 12 percent since October. They closed almost flat at $45.63 on the New York Stock Exchange on Tuesday.

"This sale would not only remove potential conflicts of interest within MSCI's business model, but the MSCI stock could benefit as we believe ISS was not being properly valued," Macquarie Capital analyst Kevin McVeigh said.

Morningstar Inc analyst Peter Wahlstrom said he does not foresee any major strategic shift from the new owners.

"It is a pretty established business with good cash flow and if a private equity sponsor has purchased that business, there are certain attributes they like," he said.

ISS has more than 1,700 clients for its corporate governance services - well ahead of competitors such as Glass, Lewis & Co - and accounted for about 12 percent of MSCI's operating revenue of $1.03 billion in 2013.

Recommendations from ISS can have a noticeable impact on how shareholders vote. On average, shareholder support was 30 percent lower at Russell 3000 companies that received an "against" recommendation by ISS on their executive pay, for instance, according to a study by compensation consulting firm Semler Brossy.

Analysts said MSCI managed to obtain a good price for the business.

"The company is getting three times revenue for the sale of that business and is left with a more higher margin and more streamlined MSCI," said Wahlstrom.

Joel Jeffrey of Keefe, Bruyette & Woods said the sale price was at the high end of his estimated range. Jeffrey has a "market perform" rating on MSCI stock.

Vestar was part of a group that acquired Del Monte Foods in a $5.3 billion deal in 2011. The group included KKR & Co LP and Centerview Capital.

Morgan Stanley served as financial adviser to MSCI and Davis Polk & Wardwell LLP was the legal adviser. (Reporting by Neha Dimri in Bangalore and Ross Kerber in Boston; editing by Sriraj Kalluvila, Maju Samuel and Matthew Lewis)

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