A ‘value-creating’ event approaches for this education stock and its friendly activist investor

Finance

Company: Pearson PLC (PSO)

  • Business: Pearson delivers learning through providing a range of educational products and services to institutions, governments, professional bodies and individual learners. The company operates through three segments, which include North America, core and growth. The company’s North America segment includes assessments and services businesses in the United States and Canada. The company’s core segment includes assessments and services businesses in more mature markets including the United Kingdom, Australia and Italy. The company’s growth segment includes assessments and services businesses in emerging markets including Brazil, China, India and South Africa. The company provides content, assessment and digital services to schools, colleges and universities, as well as professional and vocational education to learners to help increase their skills and employability prospects.
  • Stock Market Value: $5.2 billion ($7.05 per share)

Activist: Cevian Capital

  • Beneficial Ownership:  7.02%
  • Average Cost: $6.66 per share
  • Activist Commentary: Founded in 2002, Cevian is an experienced European activist investor and a long-term (5 year-plus), hands-on owner of European listed companies. Cevian’s strategy is to help its companies become better and more sustainable over the long term, and to earn its return through an increase in the real long-term value of the company. Cevian generally looks for board representation in portfolio companies and tries to work constructively with management, having never resorted to a proxy fight. Presently, Cevian’s professionals serve on the boards of ten portfolio companies in seven different countries. It has a concentrated portfolio of 10-15 companies and with one or more of the following characteristics: (i) strong market positions and good long-term fundamentals; (ii) may be facing short-term challenges, cyclical headwinds or have history of underperforming their peer groups; (iii) significant scope for improving the company’s competitiveness and performance through operational, strategic, structural, financial and governance changes; and (iv) underappreciated, undervalued and out-of-favor with the market.

What’s Happening:

Cevian has discussed numerous operational and strategic opportunities to maximize shareholder value with the company’s board and management, including, without limitation, opportunities to improve management.

Behind the Scenes:

Pearson is a UK-based learning company. This is Cevian’s seventh investment in a U.K .Company having previously invested in: RSA (2013 to current), Vesuvius (2012 to current), Old Mutual (2008-2014), Wolseley (2010-2014), Cookson (2011-2012) and Alent (2012-2015). Its UK investment group is led by Lord Myners who joined Cevian as a partner in 2011. Myners was the Financial Services Secretary in the UK’s finance ministry during the Labour Government of Gordon Brown from October 2008 until May 2010. He also served on the Prime Minister’s National Economic Council and now sits as a crossbencher in the House of Lords. Notably, Myners was also formerly the chairman of the Guardian Media Group, publisher of The Guardian and The Observer newspapers.

Cevian has been following Pearson closely for several years. They believe that the company has a collection of leading businesses in attractive markets, but several of these businesses have yet to deliver on their full potential. Their analysis concludes that Pearson should outperform its competitors, and produce attractive, growing and predictable returns. This will require first-rate decision-making and robust execution. This will require a CEO with a clear track-record of shareholder-value creation, and the company’s current CEO, John Fallon, announced last year that he will be retiring in 2020. The company is presently searching for his replacement and you can be sure that Cevian will want to actively work with the board to select the new CEO and help the company to realize its full potential.

CEO succession is one of the most important things a board does and one of the most potentially value-creating events for shareholders. It is a major lever for activists in helping to create shareholder value and we expect that Cevian will inject itself into this process, preferably from a board level.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire owns Pearson in the fund. 

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