Pearson shareholder discontent over PRH sale

Analysts have said Pearson’s move to sell its 22% stake in Penguin Random House is “necessary” and “sensible” for the education giant to shore up its balance sheet over the next few years, but there is some discontent among shareholders, they revealed.

Yesterday Pearson agreed to sell 22% of its stake in PRH to co-owner Bertelsmann for $1bn, giving the latter a 75% stake in the trade publisher, while it is left with 25%, valuing the publisher at $3.55bn (£2.76bn) including debt. At the same time, the company agreed to return £300m in surplus capital to shareholders in a share buyback.

Shares rose 3% in the immediate aftermath of the news on Tuesday (11th July), but by end of the day it had dipped by 5.1% after some shareholders were unhappy about the level of dividend released, it has emerged. Pearson ended its stint on increasing dividends in January at the same time as issuing a major profit warning.

Ian Whittaker, analyst at Liberum, told The Bookseller news of the disposal "does not seem to have gone down well with investors" after the share price dropped and because the dividend level was not as high as shareholders were expecting.

"Shareholders are disappointed at the share price reaction,” Whittaker said. “The key things shareholders aren't happy about are: They have realised the dividend level moving forwards for Pearson will not be as great as expected - that's crucial and a key driver. (There are) questions on the balance sheet, because they have not returned as much cash as some people will have hoped on the transaction…And, also as well, there is that feeling, 'Well they've sold the FT, they've sold the Economist, they've sold most of their stake in PRH, what else can they do now?'" 

"It definitely makes sense, it's just the market hasn't particularly liked it," said Whittaker, adding that Pearson had done "a fair job of trying to square the circle of limiting dilution and protecting the balance sheet".

Jonathan Helliwell, a media analyst at Panmure Gordon, agreed. "I think it's a necessary move - this sorts out Pearson's balance sheet and gives them a strong financial position to work their way through all the challenges they have in education over the next few years,” he said. “I can see exactly why they're doing it, it at least gives them financial strength, but the deal itself is not as good as expected. More importantly the dividend guidance is quite cautious - just a sign of how tough things are."

He added: "The price could have been a bit higher. It's only a half sale, and they're handing back less than half to shareholders - they're keeping most of it on the balance sheet...Shareholders are glad it's happened, but slightly underwhelmed by the eventual outcome; stocks are a bit down, by 5%."

But analyst Roddy Davidson at Shore Capital praised Pearson's move as "probably a fairly sensible course of action, given its focus on the learning market and the progress PRH has made in recent years financially".

Going forwards, Pearson and Bertelsmann have simplified the process for when Pearson does choose to sell its remaining 25% stake in PRH after the 18 month lock-in period. If Pearson doesn't accept Bertelsmann's offer to buy the remaining 25% in this scenario then, rather than having to recapitalise its stake, it will have the option to sell to a third party. 

Davidson remarked that the sale of Pearson's remaining 25% stake in PRH, to exit from the business entirely, would likely happen "sooner than later", following the expiration of the 18 month lock-in period, after the company "set out its stall" to focus on education. Likewise Helliwell said he "wouldn't be at all surprised to see that happen" now it is no longer a strategic owner of PRH. 

Pearson is "bang in line" to meet its January guidance, Fallon said during a conference call on Tuesay (11th July) although further detail won't be forthcoming until its interim results at the start of August.

Its deal with Bertelsmann is expected to close in September 2017.