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Private equity firms feasted on the cheap UK stock market for as long as they could in 2021. Eventually, investors bid up the share prices of much of their potential prey. But one target — educational publisher Pearson Plc — just kept falling. Now buyout firm Apollo Global Management Inc. is circling. Pearson investors must be desperate to sell, but they may regret presenting an easy win to the PE industry.
Apollo initially made an 800-pence-per-share approach in November.
Recently came an 854-pence-per-share proposal, including a recently announced dividend, valuing Pearson’s equity at 6.5 billion pounds ($8.5 billion).
That’s a rough 40% premium over the company’s value before the shares started rising on takeover speculation last week. Back then, the average analyst price target valued the London-based firm at 5.8 billion pounds. What’s not to like?
Pearson is clearly an attractive candidate for the buyout treatment.
The core business of college textbooks has been disrupted by digitisation.
Management’s failure to adapt fast enough is why the stock has traded so weakly, making for an affordable acquisition. And yet education is a growing global industry with fantastic long-term prospects. Pearson is already showing signs of turning itself around. Apollo, having previously owned and transformed educational publisher McGraw-Hill, ought to be capable of accelerating that nascent recovery by taking the company out of the public eye.
A deal would seem to stack up for Apollo even if the firm did little to improve the business. The total cost of the current proposal, adding assumed net debt, would be 6.9 billion pounds — around 11 times this year’s forecast earnings before interest, tax, depreciation and amortisation. Apollo could probably afford to pay half of that with borrowed cash, leaving a 3.5 billion-pound equity check.
Fast forward five years, and what might Apollo be able to sell Pearson for? Analysts at Canaccord Genuity Ltd.’s Quest unit pencil in Ebitda of some 965 million in 2027. Apollo’s move looks like an opportunistic attempt to take the publisher private when it’s both cheaper and less risky than it has been for some time. Clearly, Apollo needs to go higher and Pearson’s resistance thus far is justified. A 10% sweetener would doubtless see investors put huge pressure on the Pearson board to cave in. Yet even at that level, they should be asking why Pearson can’t replicate most of what Apollo would do while staying a public company.
—Bloomberg