August 12, 2015 5:11 pm
Some question use of £1.3bn from FT and Economist sales
T
he Château Latour vineyard went in 1989, the waxworks of Madame Tussauds were sold nine years later, followed by investments in Lazard and the TV production company that made Baywatch.
Now, Pearson has parted with two of its last trophy assets: the Financial Times and a 50 per cent stake in the publisher of the Economist, for a combined £1.3bn.
ON THIS TOPIC
- Pearson sells Economist stake for £469m
- John Fallon Path for FT and Pearson
- Pearson reaffirms profit outlook
- FT Group bid battle went to the wire
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But if John Fallon, Pearson’s chief executive, thought that a narrower focus would automatically win over investors, he may be disappointed.
Shares in Pearson, the world’s largest education company, have fallen by one-fifth since the end of March. Even selling the FT Group and the Economist Group stake for more than most analysts’ valuations of the businesses failed to buck the trend.
“It is intriguing,” says David Reynolds, an analyst at Jefferies. “There is a perception that the impact of technology — and all things digital — is yet to run its course in educational publishing.”
Some investors are questioning Pearson’s ability to benefit from this after four years without organic revenue growth. While the company now has the cash for large acquisitions, doubts surround its ability to buy shrewdly.
“There’s the glare of investors on them,” says one top 10 shareholder. “We’ve sat down and spoken to them about returns [on acquisitions].”
Another major shareholder warns: “There’s a lot of spaghetti to be sorted out, particularly in the US . . . The last thing you want to do at the moment is throw another acquisition in.”
Mr Fallon says Pearson is “on the brink of another period of concerted underlying growth”. He is trying to reframe Pearson into a pure education company that can roll out software globally, and sell more expensive learning systems instead of textbooks.
“Old Pearson” — as one analyst fondly remembers the company between about 2005 and 2010 — was buoyed by government spending on education and economic growth, and contract wins in the US. It spent billions of pounds acquiring businesses in digital education and emerging markets.
Since then, however, the company has come up against three strong headwinds.
First is what the company describes as cyclical pressures, mainly in the US, where the group derived 60 per cent of its £4.9bn in revenues last year. These include an economic recovery that is too early-stage to drive college enrolments, and political opposition in some states to Common Core — a federal government-backed plan to implement common school standards across the country, for which Pearson is a key supplier.
Last month, Pearson said the pressures were “slightly worse overall than we expected at the start of the year”. Morgan Stanley analysts concluded that the “prospects of a cyclical upturn in 2016 look weaker” — noting that further US states could drop out of the Common Core programme.
Second is the shift from printed textbooks and materials to digital products and learning services. Pearson completed a two-year restructuring plan at the end of last year, which involved closing some book warehouses and reshaping sales teams. But this may not be enough, given that other media companies have struggled to make money from digital formats, says Simon Baker, an analyst at Société Générale.
Third is the legacy of rapid acquisitions, which has left Pearson with a variety of technologies and infrastructures. It has some 50 data centres in the US, and its learning software has often been built differently. Mr Fallon says this “spaghetti” will largely be untangled by the end of 2017, leading to lower technology costs and higher profit margins from the following year.
He argues that Pearson now has four areas of focus that will drive growth: virtual schools; online universities; private language schools, such as Wall Street English in China; and higher education coursework, including digital materials.
Investing in these products is Pearson’s priority. “They today make up half of our revenues; they will soon be 75 per cent,” Mr Fallon says.
Claudio Aspesi, an analyst at Bernstein, says Pearson is “finally addressing the integration of digital education businesses into a coherent set of products and services”.
Since 2010, Pearson has spent £2.8bn in cash on acquisitions. Two of the biggest — language school chain Grupo Multi and SEB, which sells learning systems — were in Brazil, a market championed by Mr Fallon that subsequently went into recession.
Mr Fallon has sought to assure investors that Pearson is “not in a rush” to make more purchases. Before 2010 “we were pushing the boundaries a little”, Mr Fallon admitted. Now he says: “We’re not looking at virgin territory. We’re looking at adding to growth platforms that we’ve already got.”
Some analysts have already poured cold water on one rumoured purchase: the education software company Blackboard — whose private equity owners are eyeing a multibillion dollar exit. It seems it will not be on Pearson’s list of targets if it does start spending its cash.
After selling the FT Group and the Economist Group stake, Pearson will have one remaining media asset — a 47 per cent stake in publisher Penguin Random House, over which it has a sell option from July 2016.
Pearson has suggested it may keep the stake until at least 2017, when synergies from the integration of PRH are expected to materialise. Nonetheless, the cash is expected at some point. “We all know what they’re going to do ultimately,” said one top 10 shareholder.
In the medium term Pearson may look to return cash via buybacks and special dividends, Mr Fallon said. That would break with the company’s long-held policy —— but may help demonstrate discipline to investors.
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