LONDON (Reuters Breakingviews) - Pearson is a textbook case for activist investment after the pandemic. The education group has been a long-term laggard under departing Chief Executive John Fallon. Though any turnaround is likely to be painstaking, a patient but persistent shareholder can speed the process along. The arrival of Cevian Capital, which on Thursday disclosed a 5.4% stake in the company, looks well timed.
Many activist investors are likely to face a more hostile environment after the Covid-19 crisis. It’s harder to push a company to break itself up when prospective buyers are preoccupied with surviving a severe economic slump. Meanwhile, boards of directors will find it easier to reject demands that they spend a company’s valuable cash on buying back shares.
Even so, coronavirus-related lockdowns are heaping extra pressure on underperforming and poorly run companies. Pearson is a prime example. The $5 billion textbook publisher and testing group has long struggled with the shift to digital learning. It has issued seven profit warnings in less than seven years. Despite selling assets including the Financial Times and its stake in publishing giant Penguin Random House, net debt still exceeded EBITDA at the end of last year. Even after a 12% jump on Friday, Pearson shares are down about 40% in the past 18 months.
Performance is unlikely to improve overnight. The Covid-19 outbreak forced Pearson to shut many of its testing centres, costing the company between 25 million pounds and 35 million pounds a month. If U.S. colleges remain closed after the summer, lower enrolments will hit sales of its textbooks.
However, lockdowns have also forced teachers and students to embrace online learning. This switch is unlikely to be fully reversed as schools reopen. Higher unemployment could also stimulate demand for education as people seek new skills.
A turnaround will depend on hiring a capable CEO. Pearson is considering internal and external candidates, but Cevian would clearly prefer an outsider. Even then, any revival is likely to be gradual. After Friday’s bounce, Pearson’s enterprise value is still less than 9 times expected EBITDA for 2021, based on Refinitiv forecasts. For a patient activist, that’s an opportunity.
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