PSO Pearson Plc

By Simon Zekaria 

LONDON -- Shares in Pearson PLC plunged Wednesday after the world's largest education company warned of weaker earnings and a possible dividend cut and said it plans to sell its stake in book publisher Penguin Random House.

Pearson singled out continuing declines in North American sales of higher-education course materials for its worsening prospects. Overall, the company said its revenue fell 30% in the fourth quarter, capping a full-year decline of 18% that it called unprecedented.

Growth in employment and increasing education regulation has reduced higher-education enrollments in the U.S., which has put pressure on Pearson's business even as it seeks new sources of growth in emerging economies such as Brazil and China. Pearson is also grappling with a difficult transition to digital formats from print for many of its higher-education products.

"There is no getting around how tough it is," Chief Executive John Fallon said of the education sector in a call with reporters. He admitted the company got "big calls" wrong on U.S. college enrollments and revenue forecasting.

Pearson said it still expects its 2016 operating profit to be in line with its previous guidance. Nonetheless, its shares were off 29% at GBP5.74 ($7.11) in afternoon trading in London.

Pearson said it plans to sell its 47% stake in U.S.-based Penguin Random House -- one of the world's largest book publishers -- to bolster its finances and invest in other parts of its business.

Its joint-venture partner, German media company Bertelsmann SE, said it was open to raising its stake in the publishing house "provided the financial terms are fair."

The publishing house was formed in 2013 when the two companies combined their book-publishing businesses. Three months ago, Pearson said Penguin Random House was performing better, partly from movie-tie-in sales for books such as "The Girl on the Train" by Paula Hawkins in addition to best-selling new work by authors Colson Whitehead and John Le Carré.

"The ball is very much in Bertelsmann's court," Pearson Chief Financial Officer Coram Williams told reporters. In the absence of a deal, Pearson would seek to recapitalize the stake and extract a dividend, he said.

Pearson's share price has almost halved in the past three years and the company has laid off thousands of employees amid sales pressures in key markets. It has sold several assets during the period, including the Financial Times newspaper and its 50% noncontrolling stake in the publisher of the Economist magazine, raising billions of dollars to fund its growth across global education.

While higher education in North America remains Pearson's biggest problem, the company also has struggled to capitalize on the Common Core primary- and secondary-education standards in the U.S., as that government initiative has faced a backlash in several states.

"This is a tough time for the company," Mr. Fallon said on Wednesday. "We have to move decisively and urgently."

Pearson said its 2016 revenue fell 8% on an adjusted basis. It expects to report an adjusted operating profit, before restructuring costs, of GBP630 million, in line with previous forecasts and reflecting GBP55 million in savings on staff compensation. The comparable figure for 2015 was GBP723 million.

For 2017, it sees operating profit on the same basis of GBP570 million to GBP630 million, with adjusted earnings per share of 48.5 pence to 55.5 pence. Pearson also scrapped its 2018 earnings target, saying it was beyond reach.

The company sees its 2016 dividend at 52 pence, in line with its guidance. However, it said that from this year it intends to "rebase" its dividend to reflect portfolio changes, increased investment and earnings guidance.

"Management are still clinging to the mantra of a longer-term stable business, but with visibility so low on their key profit driver [of] U.S. higher education and given the increasing signs of structural pressure, we do not see how management can have confidence they can turn things around," Liberum analyst Ian Whittaker said.

News Corp, which owns Dow Jones & Co., publisher of The Wall Street Journal, competes with Pearson's book publishing operations.

--Ian Walker in London and Ulrike Dauer in Frankfurt contributed to this article.

Write to Simon Zekaria at simon.zekaria@wsj.com

(END) Dow Jones Newswires

January 19, 2017 02:47 ET (07:47 GMT)

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