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Pearson faces "deep-rooted challenges" as CEO joins FTSE exodus

The educational publisher said it will consider potential new CEO candidates from within the company and as well as external options, of which there are many after the flood of FTSE 100 departures this year

Pearson PLC -

Pearson PLC (LON:PSON) chief executive John Fallon’s retirement plans take the number of FTSE 100 chief executives departures to 22 this year and raises the question of who would want to replace him at the helm of a company facing ongoing challenges.

Founded in the early years of Queen Victoria’s reign as a construction company before coming to be best known as the publisher of the Financial Times and The Economist since the 1950s, the FTSE 100 group has undergone more major restructuring in the past decade.

READ: Pearson boss steps down as final stake sold in Random Penguin

Since building up its educational unit since the end of the previous decade, this has been an increasing focus, reaching its zenith as the FT and the Economist stake were both ditched.

Wednesday's £530mln sale of the remaining stake in consumer book publisher Penguin Random House, along with a £350mln share buy-back, completes the transition to education. 

However, this strategy has not been far from plain sailing for Fallon, former boss of the group’s international education unit who took the helm in 2013 and is still just 56 years old.

But the shares have roughly halved in value during his tenure as the strategic leap away from the structurally challenged world of business publishing landed the group fully focused on a sector with its own structural challenges.

Not an easy fix

Investors may be tempted to cheer his departure, adds Ian Forrest, investment research analyst at The Share Centre, “but his successor will not have an easy time turning around the struggling US higher education business and addressing the longer term challenges facing the sector”.

This point was echoed by analysts at Barclays: “It is fair to say some investors will welcome a fresh approach to execution at Peason. But we have consistently felt the challenges in college courseware and elsewhere are not easy to fix.” 

The central problem of the company and its rivals, says Russ Mould, investment director at AJ Bell, is that students and educational institutions have moved away from buying expensive hard copy academic textbooks.

Selling off Random Penguin, as some in the industry call it, and the share buyback, "feel as if Mr Fallon is doing his best to end his six-plus-year tenure at Pearson on the front foot rather than the back, after multiple profit warnings and a huge dividend cut during his time in charge", says Mould.

“Investors may therefore, in their darkest moments, wonder whether Mr Fallon is looking to get out before actual trading takes a further turn for the worse, after September’s trading alert.”

Indeed, the announcement of the CEO's exit rumbles along just weeks after North America's biggest textbook publisher warned that it expected sales of US textbooks to tumble 20% and for profits to be at the bottom of its guided range.

On the plus side, this year has seen positive underlying revenue growth across all divisions for the first time in six years, with the blame for the weakness being placed firmly on the US higher education courseware segment.

“The strategic plan of cost-cutting, asset disposals and a share buyback was a response to 2017’s profit warnings and dividend cut, but they still look like short-term fixes for a company that faces deep-rooted challenges," says Mould.

“The problems appear to be two-fold, judging by the latest in a long string of profit disappointments.

“First, sales of printed books are falling faster than thought, as students rely on second-hand tomes or digital versions, to cut their outgoings. Second, Pearson appears to be losing share in the digital market.

“Both of these developments compound the threat of Open Education Resources (OER), whereby universities make best-of-breed lecturing and educational materials freely available, so other students and lecturers can copy, use, append and even modify the documents, and cut down on the expense of buying or renting the sort of textbooks provided by publishers such as Pearson.”

Potential replacements

With more than a fifth of the FTSE 100 index's company bosses having left or had their exit announced in 2019, there are plenty of experienced potential candidates to replace Fallon among that number alone. 

It seems unlikely that BP PLC's (LON:BP.) Bob Dudley, Tesco PLC's (LON:TSCO) Dave Lewiws, Rakesh Kapoor of Reckitt Benckiser Group PLC (LON:RB. or Iain Conn of Centrica PLC (LON:CNA) would be up for the Pearson job.

But might Alison Cooper, outgoing boss at Imperial Brands PLC (LON:IMB), or John Flint, ex of HSBC Holdings PLC's (LON:HSBA) and Veronique Laury of Kingfisher PLC (LON:KGF) throw their hat in the ring?

Pearson said Fallon will retire in 2020 once a successor has been appointed, with the appointment process, led by chair Sidney Taurel, "will consider external and internal candidates".

Group chief financial officer Coram Williams has been in the role since 2015 and at the company for nigh-on 17 years, having been CFO of Penguin and overseeing the integration with Random House.

Tim Bozik, who is in charge of the 'global product' and North America courseware, overseeing product strategy, R&D and product management, has been with the group since 2014.

At Pearson since 2010 and a three-decade of the industry, Pearson UK boss Rod Bristow also took responsibility for the online learning businesses, covering schools, higher education and employer-based learning.

Giovanni Giovannelli, a Harvard Business School graduate, is president of the 'core & growth' business, having joined as MD of Pearson Brazil when the group acquired English language learning business Grupo Multi in 2013.

Quick facts: Pearson PLC

Price: 552.2 GBX

LSE:PSON
Market: LSE
Market Cap: £4.16 billion
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