the times | Tuesday March 15 2022 41

CommentBusiness

Apollo’s mission lands Pearson with

a textbook corporate headache

Pearson added Alton

Towers to the Madame

Tussauds leisure stable

F

or many, the debate over

energy policy is beginning

to have a familiar feel to it.

On one side sit centrist

government ministers, large

chunks of UK plc and high-minded

civil society groups arguing for net

zero; on the other Nigel Farage,

Steve Baker and a collection of self-

styled straight-talkers who say net

zero is “net stupid” and call for a

referendum. In the middle sits a

prime minister trying to hold his

party and leadership together by

appearing more coy about the topic

than he actually is. Remind anyone

of Brexit?

If the comparison feels overblown

now, it may not in a few months’

time. Amid reports that the energy

price cap for households could rise

to £3,000 in the autumn, growing

pressure on the Treasury to help

with the cost of living and a

revamped Boris Johnson-led

strategy on supply in the works, the

politics around energy are going to

move quicker in the next few

months than any time since net zero

was passed into law three years ago.

There are three points where this

is going to come to a head.

The first is energy security and

where development of new oil and

gas should be encouraged by a

government committed to

decarbonising power by 2035. While

the government is relaxed about

exploration in the (declining) North

Sea fields, it is in a tighter political

bind over whether to lift the

moratorium on shale gas. Advocates

argue that the UK’s Bowland Shale

is larger than the most productive

American fields and it is a faster

track to gas independence than

relying on tight liquefied natural gas

markets. Opponents say that it is

deeply unpopular in the parts of

Lancashire and Yorkshire that sit

above the largest shale deposits,

won’t bring down the prices we pay

in the international market and will

take longer to develop at a higher

cost than many realise. Johnson

could probably let them frack

without a penny of subsidy and still

meet his net-zero goals. But pleasing

some vocal MPs on this topic risks

upsetting others on the end of vocal

anti-shale campaigns in their

constituencies.

The second is over how to unlock

the significant amounts of capital

required to transition the UK’s

energy mix away from hydrocarbons

in the long run, while replacing

Russian products in the short and

medium term. The government’s

net-zero strategy thinks that

decarbonising the power sector

alone by 2035 will require up to

£400 billion of private and public

investment. While the business

department sees this as a

“significant” opportunity with long

returns for the private sector, it

poses significant questions in the

short run.

Who bears the immediate costs

for new sources of supply — the

taxpayer or the consumer? The

Treasury will be unwilling to have

much of this fall on its balance

sheet. Consequently, what

guarantees can the government give

to the private sector that support for

new nuclear, onshore wind or solar

via consumer bills won’t be cut at

the first sign of political pressure?

Long-term investment to

decarbonise will require political

commitment, and David Cameron’s

dash to “cut the green crap” when

gas prices rose in the first part of the

last decade has had a lasting cost.

The final challenge is how you

build voter consent for the

infrastructure of new energy supply.

It is all well and good for ministers

and business to breezily say we

should go “all in” on wind or solar or

“small” modular reactors for

nuclear, but are they going to back it

up with support in the planning

system, allowing local opposition to

be overridden? Tackling this will

require creativity and cojones, and

probably cash for affected

communities, too.

So a lot hangs in the balance for

the prime minister over his energy

supply strategy. Get it right and he

caps his political recovery with a

copper-bottomed domestic policy

achievement. Get it wrong, and he’ll

learn how it feels to be on the wrong

side of a populist campaign against a

technocratic project. It won’t be the

Brexit wars, but it won’t be far off.

Alex Dawson

For a while in the

1960s, John Pearson,

the 3rd Viscount

Cowdray, was said to

be the richest man

in England. When he fancied a

premier cru Bordeaux, he didn’t just

uncork a bottle, he bought the entire

vineyard — Château Latour.

Under his watch was assembled one

of the most remarkable collections of

trophy assets, including Lazards, the

Financial Times, Penguin Books, Royal

Doulton, Crown Derby, Thames

Television, The Economist and

Madame Tussauds. But soon after he

died in 1995, his listed company,

Pearson, came under pressure to

sharpen its focus, abandon its

conglomerate philosophy and address

its reputation as a random collection

of rich man’s baubles. Thus began one

of the great corporate slimming-

downs, one that over the years led to

Pearson selling almost all its prized

assets to recycle the proceeds and

specialise in only one relatively

narrow sector, educational publishing.

It seemed a perfectly logical idea,

but it hasn’t been a success thus far.

The shares are no higher than they

were 25 years ago. The past few years

have seen a succession of profit

warnings, which culminated with the

admission, flushed out on Friday, that

the company had secretly rejected a

tentative cash offer of £6.1 billion from

Apollo Global, the American private

equity group, last November, and had

then sent its suitor packing a second

time when Apollo raised the

conditional bid to £6.5 billion.

That approach raises many

questionst. The first is historic: did that

20-year strategic clearout really do

anything for the stockholders? The

other two are more germane today.

Should Pearson have disclosed the

Apollo approach months ago?

And what should

shareholders do now?

No one has been

able to answer the

question of

whether all those

asset sales, first

under Dame

Marjorie

Scardino and then

John Fallon,

achieved anything

for shareholders. Might they have

done better to ignore the anti-

conglomerate wisdom of the day and

just sit on those baubles?

Some proved to be fabulously

valuable — eventually. The 10 per cent

stake in BSkyB was worth £3 billion by

the time Comcast took over the

satellite broadcaster in 2018, but

Pearson had long since sold it. Then

there was FTSE International, the

indices compiler regarded as mere

adjunct to the Financial Times. Today

it is a revenue-generating gem within

London Stock Exchange Group, one

representing a substantial chunk of its

£41 billion market value. And there

was Tussauds, which under Pearson

expanded to include Alton Towers and

Chessington World of Adventures. It

was ditched for £377 million. It later

became Merlin Entertainments, a

business that changed hands in 2018

for £5.9 billion, pretty much Pearson’s

entire market value today.

Perhaps these assets blossomed only

because they were no longer in

Pearson hands. And the clearout

undoubtedly extricated Pearson from

some duds, too. But the saga suggests

companies can be too purist about

offloading assets just because they

don’t neatly fit the strategic narrative.

The decision not to disclose the

original Apollo offer is moot.

Companies shouldn’t have to report

every frivolous approach. But the New

York-listed Apollo was and is credible

and has deep pockets. It had already

made a success of buying and selling

another educational publisher,

McGraw Hill Education.

The timing also made a strong case

for disclosure. Pearson had just

announced yet more bad news in

October. The shares dived by 12 per

cent because of disappointing

numbers in the United States.

Shareholders minded to sell

soon after this surely

should have been told

that the company

had just received a

cash proposal that

was a third higher

than the

prevailing price.

More

disclosure also

reduces the

danger of false

markets and insider

dealing. The share

price of Pearson rose by

8 per cent in the five days

after the first Apollo approach, before

falling back. The wider FTSE 100 was

up only 1 per cent in those five days. It

looks suspiciously like someone got

wind of something.

What happens next? After Friday’s

surge, the shares were about 10 per

cent below Apollo’s 854.2p conditional

offer yesterday. That suggests

investors think there is little chance of

Apollo lifting its price much. It has

until April 8 to raise it or walk away.

The “buy” case for Pearson is that it

is one of the biggest players in a

robustly growing business. It reckons

that demand for learning and testing

tools in schools, universities and

workplaces should grow by 40 per

cent to £7 trillion by 2030. It has

breadth of product range and scope

internationally and is well ensconced

with educators and regulators.

Set against that, it has struggled for

years to make the business sing. It

argues that all the investment in

digital and accompanying cost-cutting

is going to pay off, but that message

has sounded tired for some time.

Andy Bird, chief executive, has

modestly revived investors’ morale

with plans for a subscription-based

approach along the lines of his old

shop, Disney. But the 133,000 of

paying subscribers drummed up in the

US suggests this is not proving an easy

sell when you can rent textbooks, buy

them second-hand or even (now here’s

an idea) go to the library.

Pearson does not have that much

goodwill with shareholders. There

would be a price at which even the

most loyal would happily see the

company put out of its misery. The

risk of more mis-steps is real and the

certainty of hard cash, if enough of it,

would be compelling.

Its own advisers at Citi issued a note

just before the Apollo approach was

made public, lifting their target price

for the shares to £10. Pearson was an

attractive “safe haven” investment,

with bags of upside from the reskilling

that every employer increasingly

needs to think about. It’s a nice round

number, but it is also 29 times core

earnings per share, which is Latour

levels of priciness. Any approach

above £9 a share and

the Pearson board

would be under

pressure to start

talking.

‘‘

’’

Patrick Hosking is Financial Editor

of The Times

Alex Dawson is the practice lead, UK

politics and policy, at Global Counsel

Prime minister struggles

with balancing act as he

walks energy tightrope

Patrick Hosking

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