Pearson watch
Speculation continues to grow about a possible takeover bid for Pearson. Pearson is the most successful international education company and selling off the trade book business Penguin and The Financial Times newspaper looks to have strategic merits. This idea was further boosted when Dame Marjorie Scardino described the education business in the company’s recent Trading Update as, ‘Our key fourth quarter selling season capped another very good year. All around Pearson, our investments in content and technology are paying off. Those advantages have produced Pearson's highest ever profits in 2006, and will bolster our future growth’. However, when it came to the FT and Penguin the best she could say was that the FT had ‘added circulation and advertising’ and that Penguin’s performance was ‘good’.
With the main business doing well and the smaller bits limping along, it’s hardly surprising that Pearson has become a target for private equity (PE) concerns. When it comes to companies the size of, and with the international dimensions of Pearson, there are few UK/European PE funds of a size to make a £7bn bid. The likely local candidates would be Candover, Permira, 3i, or CVC but it’s more likely that a winning bid would come from companies like Kronberg Kravis and Roberts (KKR), Blackstone, Texas Pacific Group, Bain Capital, Macquarie or Apax Partners.
KKR have been linked in the media to a bid. While enormously acquisitive, their recent series of large transactions (like ProSiebenSAT1 in Germany) might make a standalone bid for Pearson too much of a stretch. More likely is that KKR would partner with Permira, their partner in ProSiebenSAT1.
It looks certain a PE bid will emerge, but whether this will succeed will probably boil down to whether Scardino can try to deflect a bid by disposing of Penguin and the FT, gear up the company or convince investors that the sum of the company is more valuable than its constituent parts. Her statement that this would only happen ‘over my dead body’ presupposes that she continues in her current position. Scardino may claim that Pearson has ‘fairly good dialogue with shareholders’, but when people like Richard Marwood, a fund manager with Axa (who own 2.2%) say in public that the FT ‘takes up a lot of management time relative to its value to the group’ – then her corporate corpse may already be being measured for its coffin.
While the focus is on Pearson, we think it’s a better than even bet that their main international competitor Reed Elsevier could fall to a PE fund. Reed’s share price has been on the move and the doubling in price of their Credit Default Swap (CDS) instruments in the European market is seen as a possible sign of an imminent PE bid.
Alternatively, Pearson might try to use the funds from selling Penguin and the FT to buy the educational assets of Wolters Kluwer (WK) – then again Reed may also bid for these given that in 1998 it tried to merge with WK. Watch this space!