The full extent of the difficulties Pearson is facing following the sale of the Financial Times to focus on education has been laid bare, as jittery investors sent its share price tumbling 10% after the company reported worse than expected sales.
Pearson’s chief executive, John Fallon, sold the FT in 2015, as well as its 50% stake in the publisher of the Economist, for more than £1.3bn to focus on Pearson’s educational publishing business.
Fallon’s predecessor Marjorie Scardino, who had tidied up Pearson’s sprawling conglomerate by selling assets including Madame Tussauds and Alton Towers theme park, tenaciously defended the ownership of the FT, memorably declaring she would sell the business newspaper “over my dead body”. Pearson had owned the paper for 58 years.
However, Fallon, the former head of Pearson’s international education division promoted to run the company in 2013, had few qualms selling off what had become non-core assets in its strategy to focus on global education.
Since then the world’s largest educational publisher has found itself facing tough trading conditions, reporting that underlying sales fell 7% in the first nine nine months of the year, and 9% in North America, its biggest market.
Pearson blamed sluggish demand for higher education textbooks in the US as well as a decline in its exam marking businesses in the UK and America.
Pearson looked to allay negative sentiment about the revenues decline by reiterating its full-year financial guidance, and pointed to a boost from the strength of the US dollar against the pound since the Brexit vote.
However, jittery investors focused on the issue of sales which fell short of analysts’ forecasts of 5-6% decline.
Pearson said sales trends had improved in September and October which, combined with cost cuts, enabled the company to stick with its forecast of adjusted operating profit of between £580m to £620m this year.
“While market conditions continue to be challenging, particularly in higher education, thanks to tight cost management we are on track to deliver our guidance this year and to achieve our long-term growth goal,” said Fallon.
The company added that if the pound continued to remain weak this year the earnings-per-share guidance range would increase by about 4.5p to 59.5p.
Pearson, which still owns a minority stake in book giant Penguin Random House in a joint venture with German firm Bertelsmann, announced in January that it was cutting 4,000 jobs.
The company said 90% of those losses, which account for 10% of its global workforce, were complete. The cuts, which will incur a £320m restructuring bill this year, were announced after the company issued two profit warnings in three months. Pearson said as a result of the “simplification” programme the company would save £350m a year.
Thomas Singlehurst, an analyst at Citi, said Pearson’s results were a mixed bag for investors. “The good news is that Pearson has reiterated its 2016 and 2018 guidance,” he said. “The bad news is that while guidance has been reiterated, the third-quarter organic growth was -7% at group level and -9% in North America.”
Pearson is expected to sell off its 47% stake in Penguin Random House, the world’s largest book publisher spanning titles including Fifty Shades of Grey, The Girl on the Train and Pippa Middleton and Nigella Lawson’s recipe and craft books, next year.
A sale of the business, which makes about £400m in profits and is valued at more than £2.3bn, would mark Pearson’s final exit from its once considerable non-education focused publishing empire.
If the partnership with Bertlesmann were to reach five years – the joint venture deal was completed in 2013 – the companies have the option to sell shares in Penguin Random House in an initial public offering.
Pearson held a conference call with analysts to explain its rationale for continuing to expect to hit full year financial expectations despite deteriorating sales.
Ian Whittaker, an analyst at Liberum, said that it was an “unconvincing call that will raise more doubts”. Whittaker said the group’s 7% decline in revenues was “unlikely” to recover in the final quarter of the year.
“Their attempt to put the blame for US higher education weakness on bookstores’ changing their buying patterns were not convincing,” he said. “And their explanations as to why things will get better sound unconvincing.”
Liberum compared the financial performance and strategy of Pearson as akin to that of newspaper publishers, ironic given the company’s recent exit from the newspaper market.
“Pearson will resemble more and more the newspaper stocks, which are meeting earnings numbers by cost savings but seeing significant top-line declines,” said Whittaker. “[The trading update] is more evidence for Pearson being the ‘new newspapers’.”
https://www.theguardian.com/business/2016/oct/17/pearson-shares-sales-publisher-trading-conditions