Pearson plans Penguin Random House sale as shares dive after profit warning

Pearson shares plummeted by almost 25% after the beleaguered company issued profit warnings for the next two years, said it would cut the payout to shareholders and put its 47% stake in Penguin Random House up for sale.

The share price plunge wiped more than £1.5bn from the FTSE 100 company’s market value as it said its US education business suffered a 30% slump in revenues in the final quarter of the year.

Pearson has issued a string of profits warnings in recent years and cut more than 4,000 jobs last year. The cut in the dividend this year will bring to an end almost 25 years of annual increases.

Penguin Random House is the world’s largest book publisher, with titles ranging from Fifty Shades of Grey and The Girl on the Train, to Nigella Lawson and Jamie Oliver’s recipe books.

The sale of its stake could net about £1.2bn for Pearson and would mark its final exit from its once-considerable non-education-focused publishing empire, which included the Financial Times and a 50% stake in the Economist.

Bertlesmann, which owns 53% of Penguin Random House, said it was keen to increase its stake to as much as 75% with a further investor such as private equity likely to take the remaining stake.

Pearson said it will issue an “exit notice” to Bertelsmann “with a view to selling our stake or recapitalising the business and extracting a dividend”.

It is understood that Pearson’s preferred outcome is to sell-out of the joint venture entirely.

The world’s largest education publisher has found itself struggling with a huge decline in textbook sales and the transition to digital learning.

“The education sector is going through an unprecedented period of change and volatility,” said John Fallon, the former head of Pearson’s international division, who took over running the company from Marjorie Scardino in 2013. “Our higher education business declined further and faster than expected in 2016. We are taking more radical action to accelerate our shift to digital models, and to keep reshaping our business.”

Pearson said it had been able to maintain operating profits of about £630m in line with City expectations for 2016 – but only because the company was paying £55m less than expected in management bonus payments.

It expects profits of £570m-£630m this year, well below the City consensus of about £700m, and has slashed its target of £800m in operating profits for 2018.

Pearson said the ongoing troubles at its North American education business, which accounts for about 45% of profits, meant that it would need to “rebase” future dividend payments.

The company has enjoyed a run 24 years of dividend increases, between 1991 and 2015. The 2016 dividend is being held flat.

The cut to future payouts is a major blow to Fallon and senior management.

“Our argument has been, and remains, investors have no visibility on what this company looks like in five years,” said Gary Paulin, head of global equities for Northern Trust Capital Markets. “The one saving grace, the dividend, is now at significant risk. As, we suspect, is the chief executive’s tenure.”

Pearson said it was taking actions including investing a further £50m in speeding up the digital element of its education business, and reducing ebook prices by up to 50% for 2,000 titles, “making digital rental the best option for price-conscious students”.