January 29, 2008 / 2:47 PM / 11 years ago

Stock loans surge in top-pick Reed Elsevier

LONDON, Jan 29 (Reuters) - Investors have built significant short positions in Reed Elsevier ahead of its results in three weeks despite the Anglo-Dutch publisher being rated as one of the most defensive media stocks in Europe.

Figures from CrestCo, the UK settlements house owned by Euroclear, show 10 percent of Reed Elsevier’s ELSN.AS (REL.L) London-traded stock is out on loan.

This is more than double the 4.2 percent average monthly stock lending in 2007. The lending in Reed’s stock nearly doubled to 7.7 percent between November and December.

Short-sellers sell shares they do not own in the hope of future falls so they can buy the stock back more cheaply. They can do this by borrowing stock. Changes in stock borrowing are an important indicator for analysts and fund managers although the figures alone do not explain why borrowing has jumped.

Stock borrowing can jump before special dividend dates — Reed had such a payout this month — when investors briefly lend to investors in other countries for tax-related advantages.

“The stock borrowing should have come off a lot and it hasn’t,” said one analyst who declined to be named.

According Data Explorers, which tracks stock borrowing in global shares, British regional newspaper company Johnston Press JPR.L is the most borrowed stock in the European media sector, with 19.6 percent of its market value on loan.

The surge in Reed’s stock borrowing comes ahead of the company’s full-year results on Feb. 21. Analysts expect details of a cost saving programme potentially worth around 100 million pounds ($199 million) that could boost margins through to 2010.

Some also expect Reed to increase its dividend payout ratio and extend its share buybacks.

UBS said the surge in stock borrowing could lead to a short squeeze higher on the day of the earnings if the annual results are as solid as many in the market expect.

The spike in loaned London-traded Reed stock could relate to investors adopting a relative performance trade involving buying Pearson (PSON.L) stock and selling Reed.

Another possibility is investors might be looking to exploit arbitrage opportunities between Reed’s London and Amsterdam traded shares, UBS said, adding that this was unlikely to be a primary reason for the high level of short interest.

On Jan. 18 Reed paid a special $4 billion dividend related to its sale of the Harcourt U.S. schools education business to Houghton Mifflin Riverdeep Group.

The special payout was 82 pence for London-traded Reed stock and 1.767 euros for the Amsterdam-traded shares. At the same time the number of Reed’s shares was reconsolidated with 58 new shares for every 67 ordinary shares held.

Like many media stocks, Reed was hit hard late in 2007 amid the credit market turmoil and investor concerns about cyclical companies with any exposure to advertising.

In early afternoon trading on Tuesday, Reed’s London-listed shares were up 1.4 percent at 608 pence. Although they have fallen more than 10 percent this month they have outpaced the FTSE media sector .FTASX550 by 14 percent since November and 17 percent over the past year.

Now that Reed has exited its education activities, the company has three core publishing arms; Elsevier which covers science and medical, LexisNexis for legal and Business, which spans magazines, exhibitions and marketing.

Polo Tang at UBS said Reed, trading on around 12.5 times forecast 2009 earnings per share, was cheap relative to other defensive sectors in the market.

“With the benefit of cost savings, Reed Elsevier could deliver around 15 percent constant currency EPS growth and is one of the few stocks likely to see positive earnings momentum over 2008,” he said.

ABN AMRO has described Reed as its favourite media pick for 2008 given its defensive characteristics, good visibility, standalone factors and the potential benefits of consolidation.

“There is no such thing as a non-cyclical media stock but Reed is about as close as you can get,” Deutsche Bank analyst Mark Braley said last week when he rated the stock his top media pick in a turbulent market. (Editing by Paul Bolding)

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