Here's a quick way to send your price down: suspend your share buy-back programme and spend $850m (£527m) on buying a private equity-owned business in the US at 28 times top-line earnings. Shares in Experian, the FTSE 100 credit checking firm, naturally fell 6%, not helped either by half-year numbers that showed organic revenues rising at the bottom end of the City's expectations.
The business being bought is Passport Health Communications (PHC), an operator that helps US hospitals chase payments from customers. It looks to fit well with Experian's current operations in the US; the healthcare market there is obviously huge; and the Obamacare reforms may provide PHC with a following wind.
But $850m is a mighty price to pay for a business due to generate revenues of $121m this year and make just $30m in earnings before interest and tax. Next year's outcome on the latter tally should be nearer $40m. Even so, broker Jefferies calculates that the figure will have to rise to $80m before Experian creates proper value for shareholders, rather than merely obtaining a small boost to earnings per share. That process will clearly take several years, even if all goes well.
That's the price for growth and leadership in an attractive market, Experian would argue. Well, yes, building a business with an eye to the long term should be applauded. But the acquisition still looks extremely pricey. More surprises of this sort and Experian's own rating, currently sky-high, will suffer.
