Company summary

Pearson is the global leader in education, providing print and digital learning materials and services used by millions of students every year, principally in North America but also Europe, Asia and Latin America. The Company's education related revenues top $6.5bn. The Company also owns The Financial Times Group, which has an international network of business and financial newspapers and online services and Penguin Group, which is one of the pre-eminent names in consumer publishing.

07 January 2013 | Education

Company news

Pearson Announces Plans to Exit its Adult Training Business, Pearson In Practice

Pearson's 2010 acquisition of Melorio plc does not pay off as it announces plans to exit Pearson in Practice.

​In October 2012, Pearson announced that it had initiated a comprehensive review of Pearson in Practice, a UK adult training business, in response to a radically changing trading environment. Following that review, Pearson has decided that it plans to exit this business and is therefore entering into a consultation period with Pearson in Practice staff.

 Pearson in Practice was built around Pearson's 2010 acquisition of Melorio plc. It provides industry-specific training and qualifications through apprenticeships, work-based, technical and specialised training programmes. Over the past year, changes to the apprenticeships programme - and in particular the shift from a programme-led to an employer-led model - have reduced demand for the type of programmes offered by Pearson in Practice and limited the funding available to support their delivery. Pearson believes Pearson in Practice no longer has a sustainable business model and that they can better address learner needs in other ways.

 Pearson is honouring its commitment to those on current timetables by supporting them until the completion of their course, whether with Pearson in Practice or through transferring them to another training provider. Pearson is therefore working with the Skills Funding Agency to ensure that learners continue to be supported through other skills and workplace training providers, and Pearson's other work based learning programmes.

 Pearson's talks with other market providers will include the discussion of the transfer of some Pearson in Practice assets. Following the conclusion of these discussions and an orderly wind-down period, Pearson intends to discontinue any activities retained by Pearson in Practice. If Pearson is unsuccessful in transferring Pearson in Practice assets to other training providers, Pearson is proposing to close the business.

 The cost of closure and impairment is expected to be approximately £120 million and will be reflected as a loss on disposal in Pearson's 2012 statutory accounts.

 John Fallon, Pearson's chief executive, said: "Pearson in Practice has provided quality training programmes to thousands of young people who have a real need for skills that help them secure a job. We very much regret the decision to plan for closure, but we believe we have explored and exhausted all alternatives. Our focus in the coming months will be on working with our partners in the further education sector and industry to ensure minimum disruption to learners who are currently enrolled in one of our programmes. We continue to believe that preparation for the workplace is a hugely important part of education provision in the UK, and we are committed to providing those services from other parts of Pearson."

Comment:

Pearson acquired Melorio plc in 2010 for £99.3m which at the time represented a 57% premium over the average price in the preceding 3 months and a 125% premium to Melorio’s value when it listed in 2007.

In the three years to 2010, revenues at Melorio rose from £7.8m to £58.4m and operating profit from £2m to £12.8m on the back of its 2009 acquisition of Zenos and dramatic growth in the programmer led apprenticeship market.

At the time of the Offer the board of Melorio anticipated its revenues for the year to the end of March 2011 would be £58.4m and EBITDA (before restructuring costs) would be £16.5m. It further forecast that EBITDA would rise to £25.1m in the following year, valuing the business on a forward EBITDA/EV multiple of just 3.95x. It seemed too good to be true and it most certainly was.

Too often we see PLC directors using EBITDA as the preferred measure of company performance or using it to justify the price paid for an acquisition. Of course it is no co-incidence a company’s EBITDA will generally be higher than its EBIT or PAT and similarly an EBITDA/EV multiple will generally be lower than a EBIT/EV multiple.

Ignoring depreciation and the amortisation of previously capitalised development costs reminds us of Charlie Munger’s famous quote (Warren Buffett’s investment partner), “I think that, every time you see the word EBITDA [earnings], you should substitute the word bullshit [earnings]”. Charlie certainly knows how to make a point.

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