Pearson: Apollo can offer a lesson in restructuring

The best chapter of Pearson has yet to be written. So think the higher-ups at the ailing UK education group. Its rejection of a £6.3bn equity offer from private equity group Apollo suggests management believe they can turn Pearson round. They are mistaken.

Pearson, which once owned the FT, has tried for years to shift from traditional textbook publisher to a online learning platform. Proceeds from various asset disposals have been largely squandered. While Pearson eked out a 0.9 per cent sales gain last year following four consecutive years of declines, revenue remains a third less than eight years ago. Net income has contracted by 70 per cent.

Pearson fits into Apollo’s playbook given its experience in the education sector. Apollo acquired McGraw Hill for $2.5bn in 2012 and sold the business last year for $4.5bn. McGraw increased the percentage of its revenue drawn from digital products from 25 per cent to 60 per cent.

Pearson’s low debt profile — it ended 2021 with a net debt to ebitda ratio of less than 1 times and a free cash flow of $133mn — adds to its appeal as a take-private candidate.

Apollo has chosen a good moment to pounce. Strip out the planned Pearson dividend and the 840p bid represents a 29 per cent premium to Thursday’s closing price, but below where the stock was trading at last July.

McGraw sold at an enterprise value-to-ebitda multiple of more than 12 times. Apollo’s offer — if you tack on Pearson’s £350mn net debt — values Pearson at roughly 10 times this year’s forecast ebitda. That chimes with what Veritas Capital paid to acquire Houghton Mifflin Harcourt last month.

Andy Bird, the chief executive since late 2020, has made some headway. He has generated income from subscription services for digital textbooks and demand for adult learning. But these have not offset the sharp decline in the higher education business.

Apollo has the firepower to help Pearson build a digital strategy. It probably can also afford another sweetened offer. Pearson management should consider taking it.