The dip in academic publisher Pearson’s (PSON) share price despite news of the divestment of its structurally-challenged K12 US school textbook business could reflect the fact the deal does not represent the clean break the market is looking for.
Pearson shares fall 0.7% to 913.8p as the $250m sale of K12 to Nexus Capital Management involves just $25m up front with the remainder being paid over the next three to seven years with entitlement 20% of future cash flows and 20% of the proceeds of any future sale of the business.
Liberum analyst Ian Whittaker, who has been consistently negative on Pearson shares for some time, says: ‘The key point is that it means the vast bulk of the proceeds will not be seen for a number of years. It also follows the pattern of other sales by Pearson in recent years where the transaction has not been simple.’
Whittaker also notes that due to the changes in accounting standards the division’s contribution to group profit was slightly higher than previous guidance suggested. This implies a larger impact on overall earnings from the loss of this business, though still modest at around 3%.
WHY IS THE BUSINESS BEING SOLD?
Pearson is selling K12 as it looks to become a digital-only business, responding to changes in the education market which have reduced demand for the expensive academic textbooks it sells. After a series of damaging profit warnings, investors warmed to the stock in 2018 amid some signs the business was getting back on track.
Shore Capital analyst Roddy Davidson has less reservations about the deal. He remains encouraged by the disposal which he believes will simplify the Pearson business model and ‘free up funds, resources and management time to focus on areas of the group that are better suited to generating long-term growth.’
‘More broadly, January’s trading statement added to our sense that although trading remains mixed, the group’s underlying businesses are stabilising or beginning to gain traction following a tumultuous few years.’
