Pearson closes chapter with Penguin Random House sale

LONDON (Reuters) - Britain's Pearson PSON.L is selling its 25% stake in Penguin Random House to German partner Bertelsmann BTGGg.F, ending a near 50-year association with consumer publishing to focus solely on education.

The $675 million deal will be the final move by John Fallon, whom Pearson said would step down next year after seven years as chief executive as soon as a successor was found.

Fallon has sought to transform Pearson from a conglomerate to a world leader in digital education, notably by selling the Financial Times, a 50% stake in the Economist and spinning off Penguin into a joint venture with Bertelsmann in 2013.

But he failed to predict how quickly the education market would shift from textbooks to digital products, resulting in sales falling for five years until this year, when it forecasts revenue will stabilize.

Pearson chairman Sidney Taurel, who will lead the CEO search, said Fallon had tirelessly led the group through a period of “some very challenging markets”.

Fallon said there was still a lot to do, but the group was making good progress with more than 75% of the company growing.

“We’re now at the stage where it’s time to transition to a new leader, who can bring a fresh perspective,” he said.

Broker AJ Bell’s investment director Russ Mould said Pearson was “inching towards a more digital future, but over his seven-year tenure, Fallon has not been able to drive this change fast enough to prevent a series of profit warnings”.

Shares in Pearson led gainers on the FTSE 100 index after news of the Penguin Random House deal, which will result in a 350 million pound share buyback, and Fallon’s departure.

The stock, which was trading at 1,200 pence when Fallon took over in 2013, was up 3% to 663 pence at 1110 GMT.

Bertelsmann’s Frankfurt-traded profit share certificates, a type of security, were up 0.4% at 351.5 euros.

Barclays, which has an “underweight” rating on Pearson shares, said investors were unlikely to be surprised by either announcement. “The price is in the ballpark of what we expected – a little better,” it said.

Penguin, founded in 1935 by Allen Lane and his brothers, revolutionized the book market by selling paperbacks for as little as 6 pence. It was bought by Pearson in 1970, a decade after it published D.H. Lawrence’s long-banned “Lady Chatterley’s Lover.”

Penguin Random House, which published Michelle Obama’s memoir “Becoming” and counts Tom Clancy and Margaret Atwood in its list of authors, reported revenue of $3.7 billion and operating profit of $467 million in 2018.

It contributed 68 million pounds ($87 million) after tax to Pearson’s adjusted operating profit.

Bertelsmann Chief Executive Thomas Rabe said owning all of the publishing group, which had 481 titles in the New York Times bestseller list last year, was a “milestone for Bertelsmann”.

He said Bertelsmann would continue to expand Penguin Random House through organic growth and acquisitions.

($1 = 0.7794 pounds)

Additional reporting by Klaus Lauer; Editing by Sarah Young, Mark Potter and Alexandra Hudson