Pearson Drops as Future Darkens -- WSJ
January 19 2017 - 3:02AM
Dow Jones News
By Simon Zekaria
LONDON -- Shares in Pearson PLC plunged Wednesday after the
world's largest education company warned of weaker earnings and a
possible dividend cut and said it plans to sell its stake in book
publisher Penguin Random House.
Pearson singled out continuing declines in North American sales
of higher-education course materials for its worsening prospects.
Overall, the company said its revenue fell 30% in the fourth
quarter, capping a full-year decline of 18% that it called
unprecedented.
Growth in employment and increasing education regulation has
reduced higher-education enrollments in the U.S., which has put
pressure on Pearson's business even as it seeks new sources of
growth in emerging economies such as Brazil and China. Pearson is
also grappling with a difficult transition to digital formats from
print for many of its higher-education products.
"There is no getting around how tough it is," Chief Executive
John Fallon said of the education sector in a call with reporters.
He admitted the company got "big calls" wrong on U.S. college
enrollments and revenue forecasting.
Pearson said it still expects its 2016 operating profit to be in
line with its previous guidance. Nonetheless, its shares were off
29% at GBP5.74 ($7.11) in afternoon trading in London.
Pearson said it plans to sell its 47% stake in U.S.-based
Penguin Random House -- one of the world's largest book publishers
-- to bolster its finances and invest in other parts of its
business.
Its joint-venture partner, German media company Bertelsmann SE,
said it was open to raising its stake in the publishing house
"provided the financial terms are fair."
The publishing house was formed in 2013 when the two companies
combined their book-publishing businesses. Three months ago,
Pearson said Penguin Random House was performing better, partly
from movie-tie-in sales for books such as "The Girl on the Train"
by Paula Hawkins in addition to best-selling new work by authors
Colson Whitehead and John Le Carré.
"The ball is very much in Bertelsmann's court," Pearson Chief
Financial Officer Coram Williams told reporters. In the absence of
a deal, Pearson would seek to recapitalize the stake and extract a
dividend, he said.
Pearson's share price has almost halved in the past three years
and the company has laid off thousands of employees amid sales
pressures in key markets. It has sold several assets during the
period, including the Financial Times newspaper and its 50%
noncontrolling stake in the publisher of the Economist magazine,
raising billions of dollars to fund its growth across global
education.
While higher education in North America remains Pearson's
biggest problem, the company also has struggled to capitalize on
the Common Core primary- and secondary-education standards in the
U.S., as that government initiative has faced a backlash in several
states.
"This is a tough time for the company," Mr. Fallon said on
Wednesday. "We have to move decisively and urgently."
Pearson said its 2016 revenue fell 8% on an adjusted basis. It
expects to report an adjusted operating profit, before
restructuring costs, of GBP630 million, in line with previous
forecasts and reflecting GBP55 million in savings on staff
compensation. The comparable figure for 2015 was GBP723
million.
For 2017, it sees operating profit on the same basis of GBP570
million to GBP630 million, with adjusted earnings per share of 48.5
pence to 55.5 pence. Pearson also scrapped its 2018 earnings
target, saying it was beyond reach.
The company sees its 2016 dividend at 52 pence, in line with its
guidance. However, it said that from this year it intends to
"rebase" its dividend to reflect portfolio changes, increased
investment and earnings guidance.
"Management are still clinging to the mantra of a longer-term
stable business, but with visibility so low on their key profit
driver [of] U.S. higher education and given the increasing signs of
structural pressure, we do not see how management can have
confidence they can turn things around," Liberum analyst Ian
Whittaker said.
News Corp, which owns Dow Jones & Co., publisher of The Wall
Street Journal, competes with Pearson's book publishing
operations.
--Ian Walker in London and Ulrike Dauer in Frankfurt contributed
to this article.
Write to Simon Zekaria at simon.zekaria@wsj.com
(END) Dow Jones Newswires
January 19, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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