Recovery at FT puts Pearson's Scardino in the pink

Ms Scardino can enjoy Pearson now because she kept her nerve through the downturn
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The Independent Online

When the chief executive of Pearson, Dame Marjorie Scardino, turns 60 this week, her company's shares will be close to a five-year high and the publishing group is preparing to announce its best-ever profits.

The company's educational publishing division is entering a period of rapid growth while Pearson's Penguin Books unit and its FT financial information business, which contains the Financial Times, are staging recoveries.

However, the company is the subject of intense speculation that it will receive an £8bn takeover bid from a private-equity house and there are again strong rumours that it will sell the FT. A trading update yesterday told investors to expect Pearson to report profits for 2006 of around £500m.

Ms Scardino's 60th birthday, on Thursday, comes just days after she marked a decade at the helm of Pearson, at the top of UK plc. With the company showing great results once again, is it time for her to call it a day? No, seems to be the answer (also to the question of selling the FT).

Ms Scardino has resolutely set no date for her departure, asking why she should go when the company is starting to really perform. She is enjoying herself and does not want to leave just when the company has managed to answer years of criticism.

Pearson's chairman, Glen Moreno, has stated that the company is not engaged in succession planning in the "short term".

Ms Scardino was feted in the City during her early years in charge at Pearson, as she sold off non-core businesses and invested boldly in the US education market. Her disposals included Madame Tussauds and a stake in the investment bank Lazards. Acquisitions included the landmark $3.6bn (£1.8m) purchase of the US educational publisher Simon & Schuster. Internet-mania sent the Pearson share price into the stratosphere.

Then, in 2000, coinciding almost exactly the company's acquisition of National Computer Systems, Pearson's education business and its financial publishing division headed south, hurt first by the bursting of the dotcom bubble and then by 9/11. The FT lurched into losses. Ms Scardino was knocked off her pedestal, as even an article in the Financial Times noted.

Being pummelled in the press must be a particularly stinging experience for an executive whose company owns the FT (though, unlike many chief executives, she retained her courteous and positive manner throughout).

Critics asked why the company had bought NCS at the height of the internet boom and why the company owned a business that was as cyclical as the FT.

Later, in 2004, problems also cropped up at Penguin, both with its distribution systems in the UK (a short-term problem) and, more fundamentally, through changing book-buying habits among the public.

Usman Ghazi, an analyst at Dresdner Kleinwort, says: "2005 was the first year that Pearson started to regain a reputation as a company that creates value for shareholders. In 2006, the company had another good year, despite a flat education market and a mature consumer books market."

The key to Pearson's current advantageous position in educational publishing may well be the foresight shown with that much-criticised NCS acquisition. NCS provides educational testing and teaching technology, a capability now considered crucial to winning business in the education market. Many of Pearson's key rivals, including fellow London-listed media group Reed Elsevier, have not invested so heavily in educational technology and now find themselves in difficulty ­ Reed has put out a series of profit warnings related to its education business. "The NCS deal was five years too early," says Mr Ghazi. "But they [Pearson] are sitting pretty now."

Ms Scardino pledged in 1997 that she would produce double-digit earnings growth and double the company's share price. The shares stood at 659p on the evening before she took over in January 1997. They did, of course, more than double during the internet boom ­ hitting over 2,329p in 2000 ­ but the stock subsequently suffered the cruel fate of the rest of the media sector and fell off a cliff. The rebound over the last couple of years meant the stock closed at 817.5p yesterday.

Ms Scardino has not come close to delivering on her earnings target.

Before yesterday's trading statement, which led to a series of upgrades by City analysts ­ the average annual earnings increase over the past decade was a meagre 4.4 per cent. Following yesterday's upgrades, that improves to 5.3 per cent. Allowing for the weakening of the dollar over that period gets the figure up to around 7 per cent. Not bad, but not really something to get the pulse racing. However, according to figures from Citigroup, Pearson's house broker, the company's shares have easily outperformed the UK and European media sector.

Citigroup calculated that £1 invested in Pearson in January 1997, would have provided a total shareholder return of £1.70, while Reed Elsevier would have produced £1.44 and the FTSE media index £1.23.

However, it is not as if all criticism of Pearson and Ms Scardino has vanished. One of the reasons why the company is again subject to takeover speculation is that it has an under-geared balance sheet and its mix of businesses remains unconvincing to many. Educational publishing, consumer books (Penguin) and the FT provide little in the way of synergies together.

Robert Talbut, the chief investment officer at Royal London Asset Management, a holder of Pearson shares, says: "People welcome the improvement [in performance] but are certainly looking for more ... Questions persist about the structure of the group. The company has a lot of work to do to justify retaining all of its assets."

The FT is viewed as a trophy asset. Even though it only convincingly returned to profit last year ­ producing an estimated £10m ­ it would fetch a mouth-watering price.

Analysts estimate that it would be worth £500m to £650m, with likely bidders including Dow Jones (the owner of the FT's chief global rival, the Wall Street Journal) and Rupert Murdoch's News Corp. But, if Pearson were to sell the newspaper ­ which, Ms Scardino said in 2002 would only happen " over my dead body" ­ it would make sense to divest the rest of the financial information division, which could be worth some £1.5bn.

Penguin is regarded as a mature business, with weak growth prospects. This might fetch £900m. With ready disposals like these, it is not hard to see why private equity is said to be looking at a takeover assault.

Ms Scardino can enjoy her time at Pearson now because she kept her nerve through the downturn and was brave enough to invest. A decade at the top of one of Britain's leading companies is an achievement in itself. Ms Scardino seems determined to see through her strategy and bask in its success.

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