Pearson taps equity market for £1.7bn

Pearson, the British media group, continued its expansion into the education sector yesterday with a $2.5bn (£1.7bn) agreed bid for National Computer Systems, America's largest commercial testing and educational services group.

Pearson, the British media group, continued its expansion into the education sector yesterday with a $2.5bn (£1.7bn) agreed bid for National Computer Systems, America's largest commercial testing and educational services group.

The deal is being funded via a 3-for-11 rights issue at a deeply discounted price of £10 per share. It will be the largest ever rights issue on the London market. Pearson shares fell 9 per cent to 1,828p on the news.

John Makinson, Pearson's finance director, said it would not have been appropriate to fund the deal using Pearson shares as this would not have been attractive to NCS's shareholder base. He added that a rights issue would also prevent Pearson's debt from rising too steeply after funding a series of acquisitions, such as Simon & Schuster Publishing and Dorling Kindersley, either from debt or disposals.

Mr Makinson said discounting the rights issue so heavily would make it cheaper. Goldman Sachs and Cazenove are underwriting £1.5bn of the rights issue for a fee of £7.5m. This would compare with a more normal fee of 2 per cent, or £34m. "It's hurricane insurance rather than car insurance, so it's not as expensive," Mr Makinson said. NCS may also have demanded a higher price for an all-shares deal, Pearson claimed.

Marjorie Scardino, Pearson's chief executive, said the NCS deal would help transform Pearson's educational interests, which will now contribute two-thirds of group sales. "It's got a tech-sounding name, but it's an education company, heart and soul," she said. "We think it will change the way people learn and the way people teach."

NCS is a systems and software company that processes student assessment tests from kindergarten to 16 and provides curriculum and instructional software to schools. Under its Parent Connect internet site it also provides parents with a "Big Brother" tool that enables them to check their child's exam results, school attendance and punctuality. Schools pay a subscription for the service, which is free for parents.

Pearson said NCS's applications software would provide a good fit with its educational content. Pearson Education includes the Family Education Network, a US network for parents acquired in June. Pearson said it was "on track" to launch Learning Network, its expanded online service in September It hopes to roll out NCS's US system in other countries, including the UK.

The strategic fit won approval from the City, though there were fears Pearson is overpaying. "It feels quite pricey," said Anthony de Larrinaga, media analyst at SG Securities. He pointed out that the purchase price of $73 per share was double NCS's share price at the beginning of the year. NCS recorded operating profits of $70m last year on sales of $630m. The deal is expected to deliver cost savings of $50m a year by 2002.

The acquisition overshadowed Pearson's interim year results, which showed a £123m profit compared to a £20m loss in the previous year, thanks largely to the sale of the group's remaining stake in Lazards investment bank. Pearson's trading is heavily skewed towards the second half.

The Financial Times publishing division reported a 27 per cent increase in profits to £109m, though the group's internet services, such as FT.com, showed a half-year loss of £60m. The Penguin book division also did well, with Pearson Television the one disappointment with profits flat at £32m.