Pearson shares fall 27% on profits and dividend warning

The German media giant on Wednesday said it was negotiating to buy the 47% of Penguin Random House that it doesn't own from Pearson PLC, which faces collapsing revenue at its USA educational-publishing business.

Pearson said it plans to sell its 47% stake in USA -based Penguin Random House-one of the world's largest book publishers-to bolster its finances and invest in other parts of its business. The company plans to boost the share of digital revenue in the US higher education division-Pearson's biggest and most profitable-to 75 percent by 2020 from 50 percent now, including by working with more institutions to sign up large blocks of students and cutting electronic book-rental prices by 20 percent to 50 percent, he said.

Pearson blamed further declines in North American sales of higher-education course materials for the warning but said it still expects its 2016 operating profit to be in line with its previous guidance. It withdrew guidance for 2018, leaving investors floundering.

Chief executive John Fallon said: "The education sector is going through an unprecedented period of change and volatility. Our higher education business declined further and faster than expected in 2016". The publishing house was formed in 2013 when the two companies combined their book-publishing businesses.

Analysts estimate the sale of its stake in the book publisher could net about £1.2bn ($1.5bn) for Pearson.

The company issued a profit warning in its January trading update this morning (18th January), saying that it expected profits to be between £570m-£630m this year, well below the City expectations of about £700m, and has slashed its target of £800m in operating profits for 2018, which has resulted in its share price plunging by 23%.

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So we are taking more radical action to accelerate our shift to digital models, and to keep reshaping our business.

The publisher is largely dependent on the education market, after it shed the Financial Times newspaper and half of the Economist Group in 2015.

Furthermore Pearson announced that it plans to sanction a final dividend of 34 pence for 2016, making a total overhead for the year of 52p.

In its own statement, Bertelsmann said Wednesday it would be "open" to buying up Pearson's share in the group.

The company also said it will reset its 2017 dividend due to the "unprecedented" slump in its North American business.

  • Ronnie Bowen