Decision time for Pearson

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The Independent Online
What will Marjorie Scardino do? The question has been put scores of times in offices throughout the City in recent weeks, as fund managers and analysts await signs of corporate upheaval at Pearson, the media and information giant which owns Madame Tussauds, the Financial Times, Penguin Books and Thames Television, among other stellar assets. US-born Scardino is now in the chief executive's chair and, with the company poised to announce, in mid-March, its first results since she came aboard, curiosity about a shift in strategy is nearing fever pitch.

Scardino took up her new role just two months ago, yet some investors don't appear willing to wait too much longer before reaching an initial judgement about the new management team. There will be pressure on the new chief executive to provide, if not a blueprint, then at least a broad indication of what "New Pearson" will look like, following a much-rumoured restructuring that could see asset sales and management changes.

Just why Pearson is the target of so much scrutiny is not all that mysterious, given its recent history. The company had a rocky 1996, attracting criticism particularly for its ill-starred investment in the US CD-Rom market, and more generally for its reputation as a kind of rich man's investment trust. Both the chairman, Lord Blakenham, and the managing director, Frank Barlow, agreed to bow out early.

Inevitably, the pressures sparked talk of a take-over bid from rival media companies, on the logic that if Pearson management did not restructure, then an outsider would do the work for them. Behind the take-over talk was a simple calculation: the company is worth far more broken up and sold off than its current value on the stock market. Trading late last week at about 765p, the shares would probably be worth pounds 9.50 each if the company were broken up.

More to the point, Pearson's core businesses are all media-related, and peripheral operations don't really fit. If the company really wanted to maximise shareholder value, it would streamline its activities, concentrating on publishing, financial information and television.

It was widely assumed that Scardino would move quickly on several fronts. Favourite candidates for sale among the key subsidiaries included the Tussaud Group, which might raise a net pounds 270m if sold today, and the stakes Pearson holds in the Lazard merchant banking group, worth perhaps pounds 300m. Another pounds 400m might be raised through the sale of Pearson's remaining, indirectly held stake in the satellite TV giant BSkyB.

The CD-Rom business, Mindscape, was also a much favoured target. New management always has the luxury of distancing itself from the "mistakes" of the past. Mindscape has been nothing but trouble, even if the strategy of moving into electronic publishing can readily be applauded. A sale would lead to a capital loss of pounds 250m - more than covered by the proceeds of other disposals.

The remaining assets, particularly educational publishing (Addison-Wesley- Longman and the recently acquired HarperCollins division), provide plenty of scope for further growth. So does consumer publishing, led by Penguin, and Financial Information, which includes the mighty Financial Times brand. The core media operations provide a far more focused company than the Pearson of old.

But how quickly will Scardino move? City hopes that the next set of results would be accompanied by some details on restructuring have now receded, in light of the devastating news that Penguin Books would have to take a pounds l00m hit thanks to the irregular discounts offered to some US retailers. The discovery led to an ongoing investigation that has clearly spooked the new management. Are there any other nasties out there? Scardino will want to know for sure before proceeding.

So don't expect concrete news yet on what the new management will do. That will come as a bit of a blow to Greg Dyke, who runs Pearson Television, the owners of Grundy Worldwide, Thames Television and a stake in the new Channel 5. It is an open secret that Dyke and senior management at Pearson TV want the opportunity to take an equity stake in the subsidiary. Scardino, for her part, isn't sure the TV assets should be sold. Why shouldn't a major media group like Pearson have a stake in TV?

The future of Pearson TV notwithstanding, Scardino is already looking at the core publishing businesses, and is believed to have formed a strong view on the need to develop the group's brands further. The FT Group will be an early target for change. Scardino's background as chief executive of the Economist Group, 50 per cent owned by Pearson, indicates that she is at home with the task of developing strong publishing brands, and branching out into electronic publishing and other ventures on the back of core titles.

But as for big asset disposals, it appears that the City will have to wait a bit longer. That won't go down well, and you can expect the take- over premium attached to the shares to remain in place for as long as there are uncertainties about Pearson's strategic futuren

Mathew Horsman is media analyst at the City firm of Henderson Crosthwaite Institutional Brokers.