With its sale of the Financial Times and efforts to offload its half-interest in The Economist, Pearson Plc is exiting a troubled industry to expand in one that’s struggling to grow.
Chief Executive Officer John Fallon says he plans to use the proceeds from the two publications to shore up an education business that has lost three key U.S. contracts in the past 16 months and slashed jobs to counter declining textbook sales.
“There are plenty of opportunities” in education, Fallon said by phone. “I feel very confident. We’ve got a great pipeline of new products.”
Some analysts and investors question the timing of the sales, even though the news business is in turmoil and Pearson will get 844 million pounds ($1.3 billion) for the FT plus proceeds said to be worth as much as 400 million pounds for its stake in The Economist. Pearson’s shares have fallen about 6 percent since July 20, when Bloomberg reported the FT was on the market.
“Why are they selling these titles now while they are still working on taking down costs and making their new organization work properly?” said Claudio Aspesi, an analyst at Sanford C. Bernstein Ltd. in London.
Pearson has shed stakes in Madame Tussaud’s wax museums, the Lazard investment bank, and France’s Chateau Latour vineyard to focus on education. Today it’s the world’s largest education company, with 93 percent of revenue coming from sales of books, tests and other learning materials.
Like other textbook publishers, London-based Pearson is moving away from print and toward digital materials for schools. Some 62 percent of revenue at Pearson is now from digital formats, up from 44 percent in 2009, the company says.
As it shifts online and expands in emerging markets, Pearson has gone through what CEO Fallon calls a “bruising” restructuring. Since early 2013, Fallon said, the company has eliminated more than 4,000 positions and halved its warehousing capacity for textbooks and other physical media.
“It was not easy,” Fallon said. “My job is to get Pearson’s top line growing again, and I think we’re now in better shape to start doing that.”
About half of Pearson’s U.S. revenue is from higher education, where a decline in college enrollments in recent years means fewer students are purchasing textbooks and taking tests.
The other half of its U.S. business is largely in primary and secondary schools, which have become a political battleground as states revamp teaching and testing under the so-called Common Core curriculum. A raft of new competitors have entered the market, and teachers increasingly communicate directly with one another to share ideas and materials, cutting big companies like Pearson out entirely.
Pearson has also suffered setbacks in its lucrative business of designing and administering standardized tests for schools and universities. In May, it lost the bulk of a four-year, $340 million contract in Texas, keeping only $60 million in special needs tests. In July, New York State took away a $39 million contract for evaluating third through eighth graders. And in March 2014, Florida awarded a nonprofit group a six-year, $220 million contract to administer comprehensive assessment tests, taking the deal away from Pearson.
Fallon acknowledges that the U.S. testing unit will see some 100 million pounds in lost revenue next year, but notes that it accounts for just 7 percent of Pearson’s sales and the company still has contracts in 20 states. He said Pearson has regained some share in books and digital content aimed at university students and led the market in new contracts in the first half, when it saw its fastest growth since 2011.
Sales in the first half of 2015 edged up by 1 percent, versus a 2 percent increase a year earlier, and operating profit, adjusted for some items, fell to 72 million pounds from 73 million pounds. Fallon said that as the decline in college enrollments slows, states are spending more on curriculum.
“While we’re accelerating the transition to digital,” he said, “we’re still the largest textbook publisher in the world.”
Tim Nollen, an analyst at Macquarie Capital USA Inc. in New York, said Pearson is smart to invest the proceeds of the FT sale in online education. Pearson already works on Web-based courses for about 200 schools, including Arizona State University and New Jersey’s Rutgers University.
Costs “have gotten so high you have students questioning the value” of a traditional university degree, Nollen said. “The real growth potential is in digital programs.”
Research house Outsell Inc. says the U.S. market for education materials such as textbooks and workbooks has expanded 2.6 percent annually since 2012, to $23.5 billion last year. Education technology such as software used by administrators and teachers is growing almost twice as fast -- 4.7 percent a year - - to $8.7 billion in 2014. Kate Worlock, an analyst at Outsell, says Pearson is the leading player in both areas and can benefit from its shift to the Web.
“Online education is an opportunity for the content providers to do bigger deals with universities,” Worlock said. Though growth in education is slow, “it’s very recession proof; spending is rarely cut.”
Fallon said that while the company will use proceeds from the sale of the FT and Economist to shore up its online business, there’s no rush to make acquisitions.
“We can sell the FT and not have anything immediately lined up to buy,” Fallon said. “We’ve got large scalable presences in these areas already.”
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