Overwhelmed Pearson to sell Penguin Random House to raise cash
The announcement sent the stock tumbling the most on record.
Pearson projected operating profit this year up to 19% below analysts’ average estimates.
Pearson’s partner in Penguin Random House, majority owner Bertelsmann, said it would consider raising its stake in the venture.
The capitulation contrasts with months of optimistic statements by chief executive John Fallon about the challenges Pearson faces in the US, where college enrolments and its testing business are down, and textbook sales unexpectedly declined.
Now the Penguin stake is up for sale, meaning Pearson may lose another storied name after recent divestments of the Financial Times and a 50% stake in the Economist.
The shares were halted on volatility after continuing their skid as analysts peppered executives with questions about their business and the industry on a conference call that extended past an hour yesterday.
The company’s enrolment projections were too aggressive and it underestimated the impact of rising textbook rentals on its business, executives said.
“It’s a difficult time for Pearson,” Mr Fallon said on the conference call. “We’ll manage our balance sheet so we can sustain the company through this challenging transition.”
Pearson has suffered a particularly steep decline; once upon a time it had been the darling of the London Stock Exchange.
Now, mired in an education business under threat from new technologies, Pearson is the worst-performing stock in the FTSE 100 in the new year, and has fallen more than any other in the past five years.
Pearson sank 28% at one stage in London, cutting the company’s market value to £4.75bn (€5.43bn).
Creditors also reacted. The company’s €500m of bonds due in 2025 fell 2c on the euro to 98c, the lowest since May.
The cost of insuring Pearson’s debt with credit-default swaps rose 20.5 basis points to an 11-month high of 128 points.
Analysts question whether executives at Pearson are capable of handling structural shifts in US higher education: Fewer older students are enrolling, community college admissions are dropping, and more students are renting textbooks, while new entrants such as Amazon pose a major threat.
Ian Whittaker, an analyst at Liberum Capital, estimated the Penguin stake may raise as much as £1.2bn.
