Latecomer has much to prove

BLUE CHIP: Pearson's recent strategy of concentrating heavily on television has yet to convince investors

AS ITS chairman, Lord Blakenham, loses no opportunity to point out and our chart confirms, Pearson has been one of the fastest-growing FT-SE 100 companies in the 11 years since that index was first compiled.

But, as our chart also shows, much of the growth in the share price happened in the massive spurt two years ago - and since the start of 1994 there has been a steady decline.

That decline partly reflects uncertainty over the group's June 1993 decision to concentrate on media and entertainment. The plan was to build on its longstanding newspaper and book interests with a strong push into television, where it already had a stake in Yorkshire-Tyne Tees TV and the satellite operator, BSkyB. More exotic activities, stretching from US oil exploration to Royal Doulton china and Chateau Latour vineyards, were sold.

But it is characteristic of what Lord Blakenham calls Pearson's pragmatism that it has reclassified its Madame Tussauds waxworks, Chessington Zoo and Alton Towers theme park as part of the entertainment division, along with BSkyB and Thames Television. And it cannot quite bear to part with its half-share in Lazard Brothers, the merchant bank.

Historically, the group was set up as the family vehicle to reinvest the fortune of Weetman Pearson, who struck oil on the Mexico-Texas border early this century. He was ennobled as Viscount Cowdray, and it was his second successor, the third viscount, who brought the business to the stock market in 1969.

In those days, several members of the family were on the board. Although their involvement in the business is now much reduced, Lord Blakenham is the first viscount's great grandson and the extended Pearson family's combined shareholding still accounts for nearly a fifth of the group's £3.1bn market value.

But that has fallen from nearly £4bn, as the investment community has tried to digest the implications of the moves into media and decide whether Pearson can deliver its promises.

Lord Blakenham told shareholders last year: "The thinking behind these moves is that as a media company we have great opportunities for deploying our brands and copyrights in expanding and overlapping media markets."

There has been a succession of deals since the new strategy was heralded, starting with the acquisition of Thames for £99m in June 1993. That was followed by the purchase of the Extel news agency six months later.

Last May, the so-called Global Alliance with the BBC was forged, and Pearson simultaneously paid £312m for what is now called Mindscape, a US publisher of computer and video software. In October, the group bought Future Publishing, a UK multimedia magazine firm, and last week snapped up a 10 per cent stake in the Hong Kong-based TVB television station. In the meantime, there has been a spate of other negotiations, including abortive talks to buy ITC, an American TV company with a 10,000-hour library of programmes and films.

This sequence has left many analysts confused. "It's not easy to see what they are trying to do, and where they are going," one said. "One is a bit perplexed, and I question the fact that they are not directly managing a lot of their TV assets. There is very little synergy compared with, say, Carlton buying Central TV."

"Speed has never been a feature of Pearson," remarked Derek Terrington, media watcher at Kleinwort Benson, "and they are limited in what they can do in television. A lot of people have been in there before them. I wonder what sort of force they want to be in television. Are these stakes what they want, or is that all they can get? It all has an air of being too late."

Lord Blakenham concedes that regulations are tying Pearson's hands, particularly as the UK rules prevent a television producer from owning more than 15 per cent of an overseas broadcaster.

"We would like to be substantial producers of TV programming around the world," said Lord Blakenham, "with important stakes in broadcasting stations where it helps us to build up contacts in a key market. And in the present environment, how else can we do that but by buying minority stakes?"

Pearson is slowly joining the race to converge media, producing electronic versions of the Financial Times and even a game version of Alton Park's Nemesis thrill ride. It is extending its global reach, using its shareholdings as springboards to do programme deals.

But the share price is signalling that the immediate outlook is unclear, as the world TV market becomes more competitive. The next test will be the race to mop up the TV market in the UK, after Stephen Dorrell, the Secretary of State for National Heritage, finally defines the Government's policy on cross-media ownership. That is only one of the hurdles Pearson must negotiate before investors judge its place in the global media pecking order. Until then, the shares are likely to tread water.

Activities

Newspapers (Financial Times, Westminster Press, Les Echos, Expansion, Actualidad Economica). Books (Penguin, Ladybird, Longman, Addison-Wesley). Electronic news (FT Profile, Extel). Amusements (Madame Tussauds, Chessington Zoo, Alton Towers). Television (Thames TV, stakes in BSkyB, UK Gold, UK Living, Yorkshire-Tyne Tees Television, TVB, joint venture with BBC). Merchant banking (50% of Lazard Brothers).

Share price 571p

Prospective yield 3%

Prospective price-earnings ratio 19

Dividend cover 2.1

1992 1993 1994*

Turnover 1.64bn £1.87bn £1.55bn

Pretax profit £150.8m £208.6m £262m

Net profit £105.3m £148m £181m

Earnings per share 19.3p 27p 32p

Dividend per share 12p 13p 14p

*Smith New Court forecast

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