Pearson’s latest sale only papers over the cracks.
Pearson, the embattled British education company, is raising about $1 billion by offloading almost half of its 47 percent stake in Penguin Random House. But its boss, John Fallon, is running out of assets to sell, and investors are doubtful he will put the proceeds to good use.
The structure of the long-awaited disposal works well for Pearson. It is selling a 22 percent stake in Penguin Random House, the publisher of “Fifty Shades of Grey,” to the co-owner Bertelsmann, a German company, lifting Bertelsmann’s stake in Penguin Random House to 75 percent. The two shareholders will then leverage up the almost debt-free business and extract a dividend that takes Pearson’s total cash proceeds to more than $1 billion — well above the implied $781 million value of the stake it is selling.
That means the company is maximizing cash proceeds while minimizing lost earnings. It previously expected operating profit for 2017 in a range with a midpoint of 600 million pounds. The latest sale will reduce that figure by 11 percent, it reckons, although a £300 million, or about $386 million, share buyback will mitigate the hit to earnings per share.
What Pearson gains from clever structuring, however, it loses in valuation. The deal gives Penguin Random House an enterprise value of $3.55 billion, or 6.7 times last year’s earnings before interest, taxes, depreciation and amortization, or Ebitda. Bloomsbury, a smaller rival, trades on a multiple of nearly eight times.
Pearson says it will use the roughly £500 million, or about $644 million, left after the buyback to pay off debt and finance investment in its core education businesses. The 6 percent-plus fall in the company’s share price on Tuesday implies that investors have little faith that Mr. Fallon will put the money to good use.
They’re right to worry.
In 2015 Pearson raised more than £1 billion, or about $1.3 billion, from the sale of The Financial Times and its stake in the Economist, lowering its net debt to 0.8 times Ebitda. Twelve months later, net debt was back at 1.4 times Ebitda and the company issued a profit warning after a collapse in the American textbook market.
Selling assets is no substitute for turning around the company’s ailing core business.
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