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Pearson in Talks to Sell The Economist

Following the agreed sale of the Financial Times to Nikkei Group last week, publisher Pearson is in talks to sell its 50% stake in The Economist

Philip Gorham 28 July, 2015 | 9:25AM

Pearson (PSON) confirmed over the weekend that it is in talks to sell its 50% stake in The Economist, as we forecast in our earnings note on July 24. Until we know financial terms, we are reiterating our fair value estimates of £13 for the shares. We think there is modest upside to the shares from current levels. We estimate Pearson's equity in The Economist to be valued at £400 million.

The news that Pearson is considering selling its stake in The Economist is the latest step in the firm's strategy to focus the business on education publishing, and it follows quickly on the heels of last week's announcement that it is to sell the Financial Times to Nikkei for £844 million. The strategy represents a big bet on education, and will reduce Pearson's diversification across multiple industries at a time when publishing is experiencing a seismic shift from print consumption to digital platforms.

Nevertheless, education offers an attractive long-term trajectory, particularly in emerging markets where literacy rates are growing. We also like management's focus on learning outcomes, as we believe this focus commands quite strong pricing power.

The sale of the Financial Times was valued at 2.5 times sales and 35 times 2014 EBIT, a healthy valuation, in our opinion, probably boosted by competitive bids. A similar valuation for The Economist would generate Pearson around £400 million in pre-tax proceeds, which represents the top end of our valuation estimate.

With the sales of the Financial Times last week and of PowerShool in June, we believe Pearson now has an acquisition pot of around £1.3 billion. This could be increased by the sale of Pearson's 47% stake in Penguin Random House, which is another asset that does not appear to fit management's strategy. Joint venture partner Bertelsmann is the natural acquirer of that business. We expect the capital to be invested in the education publishing business.

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Philip Gorham  

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