Hidden in Plain Sight: The Anatomy of a Takeover Target
I reveal the telltale signs that established Pearson (PSO) as an acquisition target.
The probability of a public company becoming an acquisition target in any given year is 4.3% (according to this study).
On March 1st, I predicted on Twitter that Pearson (PSO) would be a takeover target.
On March 10th, Apollo Global Management disclosed they were evaluating a takeover of Pearson. The stock surged 18%.
Pearson’s press release offered the details:
The Board of Pearson confirms that, on 5 November 2021, it received an unsolicited, preliminary and highly conditional proposal from Apollo…On 7 March 2022, Pearson received a second unsolicited, preliminary and highly conditional proposal from Apollo…at 854.2 pence per share…the Board of Pearson unanimously rejected the Second Proposal.
So, how was I able to accurately identify Pearson as a takeover target?
I’m not a crystal ball reader. Nor a Wall Street cheater. (To reiterate, I’m not acting on inside information – not that I am important enough to have any.)
Was it simply good luck, or good foresight? Probably a healthy dose of both. I was certainly fortunate in the sudden timing of the offer relative to my prediction.
But there were several clear signals that significantly increased the likelihood of Pearson being a takeover target. I outline each of them briefly:
M&A Surge in Education and UK-based Companies
When it comes to mergers and acquisitions, when it rains, it pours. And the education industry has experienced significant M&A activity as companies grapple with technological change and declining college enrollment. Two of the largest education companies, McGraw Hill Education and Houghton Mifflin Harcourt, recently announced sales to private equity companies, suggesting financial buyers see significant value creation opportunities in this industry under change.
For London-based Pearson, the M&A rush is two-fold: M&A activity for UK-based companies is also red hot. Reuters reports, “Takeover interest in British companies…is its highest in years, as the pandemic and uncertainties linked to Britain's departure from the European Union have reduced valuations.”
Once a publishing conglomerate, Pearson has undertaken a self-proclaimed “simplification” strategy, shedding non-core assets to become a simpler and more efficient company focused purely on education and digital offerings.
Among the assets sold:
The Financial Times (2015), its stake in The Economist (2015), PowerSchool (2015), Wall Street English (2017), Global Education (2017), its stake in Penguin Random House (2019), US K12 Courseware (2019), PIHE in South Africa (2020), Pearson Institute of Higher Education (2021), K12 Sistemas business in Brazil (2021), and an ongoing strategic review of its international courseware local publishing business
When a company sheds non-core assets to become “pure-play,” it is often a precursor to a sale transaction. A Company streamlining its operations is akin to a homeowner tidying the house before a sale.
Activist Cevian Capital Increasing its Ownership Position
Cevian Capital disclosed a 5.4% position in Pearson in June 2020, with notice of its intent to “discuss numerous operational and strategic opportunities to maximize shareholder value” with Pearson’s Board of Directors and management. On February 25th, 2022, Cevian disclosed its position had grown to 10.2%.
Cevian is considered the largest activist fund based in Europe. A sophisticated investor like Cevian will recognize the opportunity to maximize its investment and will often act as a catalyst for a takeover bid.
Announced Buyback of >5% of Outstanding Shares
On February 25th, Pearson announced its intention to commence a buyback to repurchase £350mm of shares in 2022.
When a company announces a buyback of this size, it suggests that, at the least, they believe their shares are undervalued. Moreover, it can indicate the company is worried about a “low-ball” takeover bid that undercuts the true value of the business. Given the subsequent disclosure of Apollo’s bid in November 2021, this is likely true for Pearson.
Pearson is an attractive target for Apollo, given its deep familiarity with the education industry. Apollo owned McGraw Hill Education from 2013 to 2021 and drove its digital transformation. Apollo was also part of a consortium that acquired Apollo Education Group in 2017.
As of March 23rd, Pearson trades at 779.6 pence per share, a 9% discount to Apollo’s latest offer. Under UK regulations, Apollo has until April 8th to announce its intention to make another offer for Pearson.
According to S&P Capital IQ, Pearson is trading around 10x forward EBITDA (Enterprise Value: £6,398, 2022E EBITDA: £629mm). The median multiple for Education transactions is 9.6x EV / EBITDA. McGraw Hill traded for 9.2x EV / EBITDA. And Houghton Mifflin Harcourt went for 9.5x NTM EV / EBITDA (according to S&P Capital IQ).
Perhaps Apollo will stretch on valuation, but Pearson seems fully priced at these levels. It could be time to take the money and run for equity holders that enjoyed the run-up.
If you enjoy reading this Report, please do us the huge favor of simply pressing the “Like” button.
This article is not investment advice. The statistics and analyses herein are the author’s opinion and should not be relied upon as fact. Do your own diligence before making any investment decisions. The author retains the right to buy, sell or otherwise transact in any security without prior notice.