(Bloomberg Opinion) -- The club of U.K. takeover targets that never get bought has an undisputed leader — Pearson Plc. But the logic of taking the troubled educational publisher private now looks stronger than it has for some time. The company’s defenses could scarcely be weaker, and there’s a plausible recovery strategy to be built amid the wreckage.
The firm has been clobbered by the digitization of U.S. college textbooks. That continues, with Pearson shares falling as much as 14% on Thursday following another grim trading update. Management has been repeatedly caught out by the pace at which students are abandoning physical books in favor of renting digital coursework, while taking advantage of the marketplace provided by Amazon.com Inc. to buy and sell any necessary hard copies second-hand.
The validity of the excuse — Pearson sells via campus bookstores, placing it one step removed from student trends — is becoming irrelevant. The longstanding chief executive officer and chief financial officer are both leaving soon, and the decline in physical textbooks has been so precipitous that it’s nearly completely done.
Private equity’s existing caution toward Pearson has been vindicated by a fall in market value exceeding 60% since early 2015. There’s been another problem, too. Management has been doing a lot of the restructuring that a buyout firm would have plotted, taking out roughly 1 billion pounds ($1.3 billion) of costs. Meanwhile, the imperative to invest in digital capability has constrained the ability to take on much debt.
There is doubtless more cost to take out. But it’s hard to see Pearson primarily as an attractive restructuring opportunity. The bolder strategy would be to use the reconfigured business as a platform to grow by acquisition and add other growth channels. An obvious hunting ground would be the education technology sector spawned by the venture capital industry.
Pearson would still be big for a leveraged buyout. Add estimated year-end net debt, plus a 25% takeover premium to its market value, and a deal would cost nearly 6 billion pounds. Still, the balance sheet is in good condition. Net debt is forecast to end the year at less than the group’s 730 million pounds of forecast Ebitda. At academic publisher Relx Plc, it was 2.5 times Ebitda at the half-year. Pearson could arguably take on more borrowing if it were in private hands. While its U.S. high education business, around one-quarter of group sales, is yet to bottom out, the rest of the company is a mixture of flat-lining and expanding businesses growing at a collective low-single-digit rate. The capital-expenditure burden appears to have peaked as well.
A deal would still probably require a jumbo equity check, involving potentially more than one sponsor. But gearing could come later through further M&A.
Pearson has proved things can always get worse before they get better: A take-out must still be merely possible rather than probable. But with the shares trading at a noticeable discount to larger peers, it invites attention. And with a management vacuum opening up, its ability to rebuff an approach is weak. Chairman Sidney Taurel’s task of appointing new leadership has taken on a fresh urgency.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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