Bernstein: Pearson Should Sell Off FT Group And Penguin, Focus On Education

The FT and Penguin are two of the most recognized brands among those owned by media giant Pearson (NYSE: PSO). But should the company sell them off to focus more on Education, its real growth engine of the moment? That seems to be the opinion of at least some analysts at Bernstein Research, which has published a lengthy note spelling out why this would work.

The 23-page note, which mainly focuses on the FT Group, is based on Bernstein’s ongoing research around the company, and specifically a report it issued back in June asking the question of what Pearson is likely to divest next, naming both the newspaper group and the book publishers as likely targets.

The main points in Bernstein’s note:

» The FT Group, over the last several years, has become less and less core to the company’s overall revenues. Between 2004 and today, the FT Group’s share of overall revenues have gone down, from 15.1 percent to 7.1 percent; ditto operating profits, down from 18.3 percent to seven percent. Part of that, notes Bernstein, is because of disposals in the FT Group. These have included stakes in financial newspapers Recoletos in Spain, Les Echos in France, FT Deutschland and a 61 percent stake in IDC. These sales have realized nearly £2 billion for Pearson, but rather than using that money to grow the FT Group, the money has gone towards further investments in Education, “an indication of where we believe Management is ultimately directing the company.”

Penguin has also decreased in balance sheet prominence, but less drastically: in 2004 Penguin accounted for 23.5 percent of revenues; today that’s 18.6 percent; in operating profits the change has been slight: from 14.6 percent to 12.4 percent.

» The FT Group and Penguin seem to be increasingly marching to the beat of its own drum. Bernstein notes (and we have covered extensively) how the FT has been moving to digital models for online and mobile content based on subscriptions rather than one-off purchases of printed newspapers — a big evolution for the company.

John Ridding, the FT Group’s CEO, told paidContent earlier this month that it projects 40 percent of revenues to come from digital by 2014. It’s approaching 250,000 digital subscriptions, fuelled by spikes from mobile users reading on tablets and smartphones.

But also, the analysts point out how the FT Group has, even with the sell-offs noted above, a pretty rich set of holdings that could be nurtured and grown in their own right to realize more value. While the FT newspaper is still the biggest revenue generator in the FT Group, other assets include a 50 percent stake in the Economist Group (“probably larger and more profitable than most think”); a share of Vedomosti (“‘The Russian FT’ could be an example for other emerging markets”); specialist financial magazines; Mergermarket; and a stake in FTSE International.

Meanwhile, Bernstein notes that while Pearson might justify Penguin as integral to Pearson’s education focus, “we believe the risks involved in owning a trade book publisher are too high relative to the declining synergies with Education in printing and physical distribution.”

» Timeframe? Bernstein has done an impressive job in crunching numbers that support its argument — even going so far as to include statistics on how people travel to work as an indicator of news reading potential — but it is less specific on when we might expect such divestments happening. It advocates a sale of Penguin assets within the next 12 to 18 months, which would realize a gain of between £700 million to £900 million for more Education acquisitions.

That would, in turn, “lessen the urgency” of selling off the FT Group, which it says should happen between 2014 and 2015 — unless a big education acquisition opportunity came up first.