Pearson Bertelsmann Random House Penguin analyse

EQUITIES MEDIA: OUTPERFORM

PEARSON OUTPERFORM TARGET PRICE 1,450p (UPSIDE 20%)

Unlocking value at Penguin

26 OCTOBER 2012

Sami Kassab (+44) 207 039 9448 [email protected]

William Packer (+44) 207 039 9509 [email protected]

Charles Bedouelle (+44) 207 039 9482

Nicolas Didio (+44) 207 039 9468

Adrien de Saint Hilaire (+44) 207 039 9499

[email protected]

Pearson and Bertelsmann in talks to merge their trade book units Pearson confirmed it was in talks with Bertelsmann to merge its Penguin trade book publishing unit (c.10% of group EBIT 12e) with Random House. According to the German trade press, talksbetween the companies are well advanced and are taking place with competition authorities. Whilea positive outcome is still far from certain, we consider such a move would be positive for Pearsonand support its share price performance.

A merger with a strong strategic rationale We believe the combination of Random House and Penguin makes strong strategic sense. It wouldimprove the publisher’s bargaining power and control over pricing in an industry where retaildistribution is increasingly dominated by a few large behemoths. The combination would also broaden the geographic and product revenue base of both companies while offering meaningfulcost synergies. Regulatory constraints appear manageable given the lower degree of industryconsolidation compared to professional publishing segments.

Over USD200m of available synergies Looking at previous similar mergers and based on our bottom-up analysis we estimate that overUSD200m of cost synergies would be available in administrative expenses, warehousescombination, printing and paper vendor consolidation. Such a move would be value-accretive (around 4% per share), boost Pearson’s group organic revenue growth profile (around 1%-pt) and operating profit margins (around 150bp) and improve investors’ sentiment on the stock.

Trading update on 9 November Pearson is due to report its Q3 trading update on 9 November. We are cautious ahead of that publication which we believe is likely to reflect the low point on industry and company-related issues (US schools, Professional, Penguin). However, we expect the rebound in US schools in 2013, EM and the digital transition in US Education coupled with corporate action around Penguinto drive a rebound in the share price performance in the coming months.

Please refer to important disclosures at the end of this report

Price (25 October 2012) 1,212p Performance* (%) 1w 1m 3m 12mMarket cap (GBPbn / EURbn) 9.9 / 12.3 Absolute (0) (2) (3) 7Free float (GBPbn / EURbn) 9.9 / 12.3 Rel. Media 3 1 (10) (1)EV (GBPbn / EURbn) 10.8 / 13.5 Rel. MSCI Europe 3 (0) (12) 03m avg volume (GBPm / EURm) 25.8 / 32.1 Reuters / Bloomberg PSON.L / PSON LNCountry / Sub Sector UK / Professional Publishing * In listing currency, with dividend reinvested Financials 12/11 12/12e 12/13e 12/14e Valuation metrics* 12/11 12/12e 12/13e 12/14eEPS, Adjusted (p) 86.3 84.6 96.5 107.3 P/E (x) 12.9 14.3 12.6 11.3EPS, IBES (p) 86.5 84.9 91.2 97.8 Net yield (%) 3.8 3.7 4.0 4.3Net dividend (p) 42.2 45.1 48.3 51.7 FCF yield (%) 8.2 6.7 7.6 8.4 EV/Sales (x) 1.6 1.7 1.6 1.5Sales (GBPm) 5,861 6,245 6,602 6,917 EV/EBITDA (x) 9.5 10.9 9.3 8.0EBITA, Adj. (GBPm) 891 920 1,047 1,171 EV/EBITA (x) 10.7 11.7 10.0 8.6Net profit, Adj.(GBPm) 692 681 776 863 EV/CE (x) 1.5 1.6 1.6 1.5ROCE (%) 11.1 10.3 12.0 13.4 Net Debt/EBITDA, Adj. (x) 0.7 1.0 0.6 0.2 * Yearly average price for FY ended 12/11

http://www.exane.com/fichiers/action/ExaneBNPPResearch-iPad.pdf

2 PEARSON │ 26 October 2012

A merger with a strong strategic rationale In our view a merger between Random House (RH) and Penguin offers a strong strategic rationale. First, by increasing scale it would reinforce the bargaining power of the publisher in an industry where the retail distribution structure is changing rapidly. The print book retail distribution network is increasingly dominated by a few large companies (Amazon, Apple, Barnes & Noble, Wall Mart and Tesco) at the expenses of the myriads of bookstores gradually disappearing. Furthermore, the increased size of this publishing house should help improve its control over ebook pricing structures, a key challenge for publishers in the digital transition. We estimate that ebooks are likely to account for close to 30% of 2012 revenues at Random House and Penguin US operations.

Secondly, we believe such a merger would drive cost synergies and alleviate the impact of analog to digital transition costs. With declining print volumes, fixed print infrastructure costs are putting pressure on profit margins as book warehouse capacity utilisation declines and printing and paper buying suffers diseconomies of scale. A merged entity should benefit from the combination of warehouses and vendor consolidation in printing and paper supplies. At the same time, the digital transition requires investments in IT capacity. A state-of-the-art digital asset management system can cost up to USD10m while the creation of 100 enriched ebooks can cost over USD1m. Recent years have witnessed several mergers driven by the same rationale like Hearst–Lagardere in magazines, Wiley-Blackwell in STM book publishing, and several more in newspaper publishing

Thirdly, the combined group would benefit from an improved geographic and product profile with each group strengthening areas of weakness in the other. Penguin is the largest English language trade book publisher in India, a market it entered 20 years before Random House. With its recent acquisition of Companiha das Letras, Penguin has become a significant player in the Brazilian trade book market. Despite its leadership in Mexico or Chile, Random House is largely absent from Brazil, the largest market opportunity in LatAm. Conversely, Penguin is largely absent from continental European markets. We also note that RH has recently diversified its digital content and technological capabilities with its acquisition of Smashing Ideas which should help the group develop enhanced ebooks, instant-book political analysis, breaking-news essays and other new digital formats.

Key financials: the global leader in trade book What is Random House? Random House is the world’s largest print and digital trade book publisher. RH is fully owned by Bertelsmann and comprises of 200 editorially independent imprints in 15 countries, publishing around 10,000 new books a year, and selling close to 400 million print, audio, and electronic books annually. RH generated EUR1.7bn in 2011 revenues of which 54% from the US and 19% from Other European countries (excluding Germany). RH is the leading trade book publisher by revenues in the US and UK markets. With EUR185m, RH contributed to 10% of Bertelsmann group EBIT11 and 13% of Bertelsmann Value Added, a NOPAT/cost of capital based metric. We estimate RH generated an after tax ROCE of 13% in 2011. RH has subsidiaries and affiliated companies for English-language publishing in Canada, the United Kingdom, Australia, India, New Zealand, and South Africa. Random House also encompasses some of the leading publishing houses in Germany, Austria, Spain, Argentina, Mexico, Chile, Colombia, Venezuela, and Uruguay.


Figure 1: Random House & Penguin stand alone financials 2009-2015e Penguin financials in GBP

2009a 2010a 2011a 2012e 2013e 2014e 2015eRevenue 1,002 1,053 1,045 1,065 1,078 1,057 1,038Underlying sales growth -2% 6% 1% -2% -2% -2% -2%Growth 5% -1% 2% 1% -2% -2% Opex 918 947 934 970 984 971 966Opex growth 3% -1% 4% 1% -1% -1% Adj. EBITA 84 106 111 96 95 86 72Growth 26% 5% -14% -1% -9% -16%Margin 8% 10% 11% 9% 9% 8% 7%

Random House financials in GBP 2009a 2010a 2011a 2012e 2013e 2014e 2015eRevenue 1,534 1,567 1,517 1,532 1,452 1,423 1,394Underlying sales growth -1% 2% -2% 8% -5% -2% -2%Growth 2% -3% 1% -5% -2% -2% Opex 1,412 1,419 1,357 1,364 1,295 1,278 1,269Opex growth 0% -4% 0% -5% -1% -1% Adj. EBITA 122 148 160 169 157 144 125Growth 22% 8% 5% -7% -8% -13%Margin 8% 9% 11% 11% 11% 10% 9%

Source: Exane BNP Paribas estimates

What would a newco look like? Assuming no revenue synergies, but close to GBP150m of cost synergies, the combined P&L of the new publishing powerhouse would generate over GBP2.5bn in revenues and over GBP300m in EBIT. We estimate it would generate around 55% of group revenues from the US market.

Figure 2: Random House-Penguin combined financials GBPm 2009a 2010a 2011a 2012e 2013e 2014e 2015e

Revenue 2,537 2,620 2,562 2,597 2,530 2,480 2,432Underlying sales growth 3% -1% 4% -4% -2% -2%Growth 3% -2% 1% -3% -2% -2% Opex 2,331 2,366 2,291 2,333 2,278 2,249 2,235Opex growth 2% -3% 2% -2% -1% -1% Adj. EBITA pre synergies 206 254 271 264 252 230 197Growth 23% 7% -3% -5% -8% -14%Margin 8% 10% 11% 10% 10% 9% 8% Synergies 0 49 146Integration costs -189 0 0Synergies & Integration costs -189 49 146As % Penguin cost base -20% 5% 15%As % group cost base -8% 2% 7%As % group revenue -7% 2% 6% Adj. EBITA post synergies 62 279 343Growth 349% 23%Margin 2% 11% 14%


With over USD200m of available synergies We estimate that cost synergies in a Random House – Penguin merger could exceed USD200m. We derive this estimate from two approaches. Our top down approach consists in looking at comparable transactions and suggests 10 to 15% of the target opex can be saved. It was 15% in the Wiley-Blackwell merger and 10% in the Hearst-Lagardere magazines acquisition. Our bottom-up approach consists in an estimate of Penguin’s opex breakdown (based on Bloomsburry reported numbers) and an estimate of the potential savings rate. For instance, we assume that vendor consolidation and scale benefits could result in a 10% reduction in the cost of goods sold and marketing expenses while we believe several administrative expenses could be reduced by 30% (finance, HR, Legal, etc).


Figure 3: Estimated cost synergies in Random House / Penguin merger

As % of revenues As % of opex Penguin cost

in GBPm Est. savings

rate Est. savings

in GBPm

Revenues 100% Cost of sales -43% 49% 479.5 26.8of which Cost of Goods sold (incl. paper, printing, cover, etc) -24% 28% 268.2 10% 26.8

of which inventory provision -3% 4% 34.6 of which royalty costs -16% 18% 176.6 Marketing and distribution costs -15% 17% 160.8 16.1of which marketing expenses -5% 5% 50.0 10% 5.0of which distribution fees and commission -10% 11% 110.8 10% 11.1Administrative expenses -30% 34% 329.3 89.3of which staff cost -21% 25% 246.3 30% 73.9other staff relates expenses -1% 1% 11.1 30% 3.3Share-based payment charge 0% 0% 2.5 Depreciation 0% 0% 4.7 Premises costs -3% 3% 32.8 30% 9.9Professional fees -2% 2% 17.1 50% 10.7Editorial expenses -2% 2% 17.0 30% 5.1Insurance 0% -1% -5.5 Bad debt provision and write off 0% 0% 3.4 Other TOTAL 145.8As % of Penguin Opex 16%


For instance, a combination of Penguin and Random House warehouses could lead to significant savings. In the US, Random House operates two warehouses in Maryland and Indiana with over 1.5m sqf, while Penguin operates a warehouse in New York (500,000 sqf) and one in Pennsylvania (400,000 sqf). Given that Pearson owns –rather than leases - both warehouses, we believe lease obligations cancellation fees would be very small. In addition, we also note that Pearson employs 2,000 people in India, the 3rd largest location in terms of headcounts. Part of this headcount includes production staff for Penguin. Greater use of offshored production resources could further improve RH cost efficiency.

Manageable regulatory constraints We believe that regulatory constraints are likely to prove manageable. Based on AAP data, we estimate that the newco market share would reach 30% in the US and around 25% in the UK. This would be less than Houghton Mifflin Harcourt or Pearson’s individual market share in US educational publishing (respectively 40% of K12 textbooks and 35% of both K12 and Higher Ed. for Pearson). In US legal or tax publishing, the market leader has over 30% market share as well. Compared to professional publishing, the degree of concentration of the US trade book publishing industry is lower, in our view. The top 50 US trade book publisher generate about 80% of industry revenues with the rest occupied by 400 medium-sized publishers and thousands of small publishers.

While this analysis is appropriate at the top line level, the combined market shares in certain subsegments (e.g. young adult fiction for instance) may exceed 30%. Yet the editorially independent nature of Random House-Penguin imprints would make related disposals possible, if regulators asked to.

However we note that other anti-trust stumbling blocks remain. Penguin is currently under anti-trust review for its actions during the creation of the agency model with Apple (along with selected other trade book publishers). No decision is expected until H213. In contrast, Random House was excluded from the lawsuit.


Pearson to benefit from lower exposure to trade book

A value creating merger We believe such a move would drive c.4% value accretion per share to Pearson shareholders. On our estimates, Penguin accounts for an estimated 10% of Pearson EBIT12 but only 4% of our current SOP. While we currently value Penguin at GBP536m in our SOP, we estimate that Pearson share of the new entity would be closer to GBP965m.

The value creation of this merger would stem from the available synergies of such a combination and the control premium that Random House would probably have to pay to Pearson in the merger process in order to retain a controlling stake in the combined entity. We have assumed that Pearson ends up with 40% of the newco (versus its EBIT12e share of 36%). This reflects a normalisation of Random House profit following the one-off success of ’50 Shades of Grey’ (with over 40m copies sold, one of the biggest commercial success ever) and a small control premium.

Figure 4: A value creating merger Assumptions

Run rate synergies as % of Penguin cost base 15%Tradebook publishing EV/EBITA 12-month forward multiple 7.0xPearson share of newco (37% of FY14 EBIT) 40%Current value of Penguin (Exane estimate GBP536m) 536Integration costs as % of runrate synergies 130% Valuation of merged entity Tradebook publishing EV/EBITA 12-month forward multiple 7.0xValue of merged entity pre-synergies 1,761NPV of post-tax synergies less implementation costs 651Value of merged entitiy post-synergies 2,413 Current Penguin EV (average SOTP, DCF) 536Value of Pearson share of merged entity EV 965Premium to current Penguin EV 80%Impact on Pearson p.s value 4%


We also note that in 2012 HarperCollins paid 1x EV/sales to acquire the leading religious book publisher in the US (Thomas Nelson). This compares to our EV/sales estimate of 0.5x. Lastly, we point that Bertelsmann uses a 1% perpetual growth rate and 7% WACC to value its Random House US intangible assets. This is more aggressive than our 0% perpetual growth assumptions and 12% WACC estimate for Penguin in our own DCF.

Improving Pearson financial profile As we forecast Penguin is to show a steady 2% underlying revenue decline in 2012-2015e, a corporate move that would reduce Pearson’s exposure to the asset would improve the organic revenue growth profile of the group. Deconsolidating Penguin would add 1%-point of organic revenue growth to Pearson PLC in 2012-2015e and 150bp to group operating profit margins. Also note that we estimate a GBP90m contingent liability in our Pearson SOP related to the ongoing Penguin-DoJ law suit.

In terms of sentiment, we believe this move would alleviate concern around the long term exposure of Pearson to an industry undergoing rapid changes and would refocus the equity story on the more appealing Pearson Education segment.


Commitment of transparency (see www.exane.com/disclosureequitiesuk for details. Complete disclosures available on www.exane.com/compliance), including a specific disclaimer concerning analysts located in Spain. Exane is independent of BNP Paribas (BNPP) and the agreement between the two companies is structured to guarantee the independence of Exane's research, published under the brand name “Exane BNP Paribas”. Nevertheless, to respect a principle of transparency, we separately identify potential conflicts of interest with BNPP regarding the company/(ies) covered by this research document. Exane

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Price at 25 Oct. 12 / 12m Target Price1,212p / 1,450p +20%

Kassab (+44) 207 039 9448 & Packer (+44) 207 039 9509 Professional Publishing | Media (Outperform) - United KingdomCom pany Highlights GBPm / EURmEnterprise value 10,814 / 13,455 Market capitalisation 9,902 / 12,321 Free f loat 9,902 / 12,321 3m average volume 26 / 32 Perform ance (*) 1m 3m 12mAbsolute (2%) (3%) 7%Rel. Sector 1% (10%) (1%)Rel. MSCI Europe (0%) (12%) 0%12m Hi/Lo : 1,294p -6% / 1,069p +13%CAGR 1996/2012 2012/2014EPS restated (**) 4% 13%CFPS 5% 10%Price (yearly avg from Dec. 01 to Dec. 11) 1 145.3 716.6 575.1 627.0 653.2 744.4 802.0 643.2 715.3 962.5 1 113.5 1 212.0 1 212.0 1 212.0PER SHARE DATA (p) Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12e Dec. 13e Dec. 14eNo of shares year end, basic, (m) 800.589 801.662 802.388 802.388 799.000 799.000 806.440 806.440 806.440 812.677 817.000 817.000 817.000 817.000Avg no of shares, diluted, excl. treasury stocks (m) 794.217 789.611 787.665 788.201 799.000 799.900 798.100 797.540 797.580 803.003 801.891 804.810 804.937 805.074EPS, company definition 28.93 30.25 32.01 30.17 34.33 43.10 46.74 57.70 65.35 77.20 86.48 84.75 96.69 107.53EPS restated, fully diluted 28.97 30.50 32.32 30.49 34.33 43.01 46.66 57.66 65.31 77.02 86.30 84.55 96.46 107.25% change 27.6% 5.3% 6.0% (5.7%) 12.6% 25.3% 8.5% 23.6% 13.3% 17.9% 12.0% (2.0%) 14.1% 11.2%CFPS 71.11 86.60 76.51 68.76 81.85 88.72 68.99 131.39 86.54 110.02 107.77 97.85 106.29 117.76Book value (BVPS) (a) 474.3 416.5 368.0 324.5 446.1 435.0 458.2 570.8 518.9 658.3 704.4 735.4 772.7 817.7Net dividend 22.25 23.42 24.19 25.39 27.07 29.30 31.60 33.80 35.49 38.68 42.17 45.12 48.28 51.66STOCKM ARKET RATIOS Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12e Dec. 13e Dec. 14eP / E (P/ EPS restated) 39.5x 23.5x 17.8x 20.6x 19.0x 17.3x 17.2x 11.2x 11.0x 12.5x 12.9x 14.3x 12.6x 11.3xP / E relative to MSCI Europe 158% 110% 127% 157% 154% 135% 122% 77% 80% 109% 109% 119% 118% 117%P / CF 16.1x 8.3x 7.5x 9.1x 8.0x 8.4x 11.6x 4.9x 8.3x 8.7x 10.3x 12.4x 11.4x 10.3xFCF yield 4.1% 9.3% 6.3% 8.7% 7.6% 6.8% 4.8% 11.4% 11.8% 11.3% 8.2% 6.7% 7.6% 8.4%P / BVPS 2.41x 1.72x 1.56x 1.93x 1.46x 1.71x 1.75x 1.13x 1.38x 1.46x 1.58x 1.65x 1.57x 1.48xNet yield 1.9% 3.3% 4.2% 4.0% 4.1% 3.9% 3.9% 5.3% 5.0% 4.0% 3.8% 3.7% 4.0% 4.3%Payout 76.8% 76.8% 74.8% 83.3% 78.8% 68.1% 67.7% 58.6% 54.3% 50.2% 48.9% 53.4% 50.0% 48.2%EV / Sales 2.82x 1.74x 1.61x 1.79x 1.75x 1.75x 1.74x 1.38x 1.23x 1.42x 1.63x 1.73x 1.58x 1.45xEV / Restated EBITDA 21.7x 12.3x 13.0x 12.6x 11.9x 10.9x 11.3x 7.8x 7.5x 9.0x 9.5x 10.9x 9.3x 8.0xEV / Restated EBITA 28.0x 15.3x 16.6x 15.4x 14.6x 13.5x 12.6x 9.0x 8.3x 9.9x 10.7x 11.7x 10.0x 8.6xEV / OpFCF 17.1x 10.3x 15.5x 12.1x 13.0x 14.6x 15.5x 8.5x 7.7x 7.8x 10.5x 11.9x 9.8x 8.5xEV / Capital employed (incl. gross goodw ill) 1.4x 1.1x 0.9x 1.1x 1.0x 1.0x 1.0x 1.1x 1.2x 1.4x 1.5x 1.6x 1.6x 1.5xENTERPRISE VALUE (GBPm ) 11,934 7,535 6,528 7,000 7,174 7,706 7,356 6,649 6,895 8,043 9,565 10,814 10,460 10,051Market cap 9,096 5,658 4,530 4,942 5,190 5,918 6,468 5,187 5,768 7,825 9,066 9,902 9,902 9,902 + Adjusted net debt 2,449 1,486 1,423 1,264 1,190 1,287 1,158 1,616 1,281 640 718 1,041 687 278 + Other liabilities and commitments 51 149 354 354 354 354 148 148 148 148 141 231 231 231 + Revalued minority interests 422 326 300 457 457 457 313 401 401 98 19 19 19 19 - Revalued investments 84 84 80 17 18 311 731 703 703 668 379 379 379 379P & L HIGHLIGHTS (GBPm ) Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12e Dec. 13e Dec. 14eSales 4,225 4,320 4,047 3,919 4,096 4,393 4,218 4,811 5,624 5,657 5,861 6,245 6,602 6,917Restated EBITDA (b) 551 615 504 558 601 704 652 847 913 895 1,009 996 1,127 1,255Depreciation (125) (122) (111) (102) (109) (135) (68) (110) (85) (82) (118) (76) (80) (84)Restated EBITA (b) (**) 426 493 393 456 492 570 584 737 828 813 891 920 1,047 1,171Reported operating prof it (loss) 426 493 393 456 496 537 563 676 755 830 791 812 940 1,066Net f inancial income (charges) (261) (131) (80) (68) (68) (74) (106) (91) (95) (85) (52) (53) (55) (51)Af f iliates - - - - - - - - - - - - - - Other (226) (57) 6 9 38 (22) 0 2 0 81 423 0 0 0Tax 33 (64) (75) (63) (124) (11) (131) (173) (198) (215) (259) (182) (212) (254)Minorities (20) (22) (22) (21) (20) (23) (26) (31) (37) (17) 1 (2) (2) (2)Goodw ill amortisation (375) (330) (264) (224) - - - - - - - - - -Net attributable prof it reported (423) (111) (42) 89 321 407 300 384 425 594 904 575 671 759Net attributable profit restated (c) (145) (89) (9) 16 274 344 372 460 521 618 692 681 776 863CASH FLOW HIGHLIGHTS (GBPm ) Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12e Dec. 13e Dec. 14eEBITDA (reported) 926 945 768 782 615 702 676 874 943 1,017 1,048 1,027 1,159 1,289EBITDA adjustm ent (b) (375) (330) (264) (224) (14) 3 (24) (27) (30) (122) (40) (31) (33) (34)Other items 321 249 214 140 223 149 82 414 (6) 154 18 39 45 50Change in WCR (7) (4) (192) 8 50 (22) 74 (69) 105 120 39 28 29 31Operating cash flow 865 860 526 705 875 831 808 1,192 1,012 1,169 1,065 1,063 1,201 1,335Capex (165) (126) (105) (125) (321) (302) (335) (410) (119) (132) (156) (156) (138) (149)Operating free cash flow (OpFCF) 700 734 421 580 554 529 473 782 893 1,037 909 907 1,063 1,186Net f inancial items + tax paid (307) (180) (115) (108) (123) (96) (145) (143) (168) (142) (162) (246) (314) (354)Free cash flow 393 554 306 472 431 433 328 640 725 895 747 661 749 832Net f inancial investments & acquisitions (6) 785 (7) 0 177 (367) (7) (290) (232) 170 (279) (632) 0 0Other (302) (191) 11 (124) (281) 106 108 (459) 67 (61) (215) 0 0 0Capital increase (decrease) 20 6 5 4 (17) (25) (60) (41) (25) (65) (39) 0 0 0Dividends paid (183) (183) (207) (197) (222) (235) (248) (285) (279) (305) (319) (351) (379) (409)Increase (decrease) in net financial debt 78 (971) (108) (155) (89) 88 (121) 436 (256) (634) 105 321 (370) (423)Cash flow , group share 565 684 603 542 654 710 551 1,048 690 883 864 788 856 948BALANCE SHEET HIGHLIGHTS (GBPm ) Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12e Dec. 13e Dec. 14eFixed operating assets, incl. gross goodw ill 6,962 6,142 6,021 5,880 6,247 6,399 4,169 5,776 5,517 5,833 6,725 7,298 7,216 7,142WCR 600 621 644 550 (43) (19) 137 252 9 (136) (505) (533) (562) (593)Capital em ployed, incl. gross goodw ill 8,758 7,074 6,894 6,601 7,349 7,376 7,640 6,028 5,526 5,697 6,220 6,765 6,655 6,549Shareholders' funds, group share 3,797 3,339 2,953 2,603 3,564 3,476 3,695 4,603 4,185 5,350 5,755 6,008 6,313 6,681Minorities 176 192 196 213 169 168 179 274 291 67 19 19 19 19Provisions/ Other liabilities 239 165 152 123 31 29 139 531 549 378 469 440 395 345Net f inancial debt (cash) 2,379 1,409 1,301 1,146 1,057 1,145 1,024 1,460 1,204 570 675 996 626 203FINANCIAL RATIOS (%) Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12e Dec. 13e Dec. 14eSales (% change) 9.1% 2.2% (6.3%) (3.2%) 4.5% 7.3% (4.0%) 14.0% 16.9% 0.6% 3.6% 6.5% 5.7% 4.8%Organic sales grow th (0.3%) 6.0% (4.0%) 2.9% 9.0% 3.9% 6.1% 1.6% 2.3% 5.5% 1.3% 1.4% 4.2% 4.9%Restated EBITA (% change) (**) 2.8% 15.7% (20.2%) 16.0% 8.1% 15.7% 2.5% 26.3% 12.4% (1.8%) 9.5% 3.4% 13.7% 11.9%Restated attributable net prof it (% change) (**) 27.1% 4.7% 5.7% (5.6%) 14.1% 25.4% 8.3% 23.5% 13.3% 18.7% 11.9% (1.7%) 14.1% 11.2%Personnel costs / Sales 29.2% 29.4% 29.4% 29.4% 31.1% 27.9% 30.5% 28.9% 30.7% 32.7% 33.8% 34.6% 35.1% 35.3%Restated EBITDA margin 13.0% 14.2% 12.5% 14.2% 14.7% 16.0% 15.5% 17.6% 16.2% 15.8% 17.2% 16.0% 17.1% 18.1%Restated EBITA margin 10.1% 11.4% 9.7% 11.6% 12.0% 13.0% 13.8% 15.3% 14.7% 14.4% 15.2% 14.7% 15.9% 16.9%Tax rate NC 20.9% 23.5% 15.8% 26.7% 2.5% 28.7% 29.4% 30.0% 26.0% 22.3% 24.0% 24.0% 25.0%Net margin (9.5%) (2.1%) (0.5%) 2.8% 8.3% 9.8% 7.7% 8.6% 8.2% 10.8% 15.4% 9.2% 10.2% 11.0%Capex / Sales 3.9% 2.9% 2.6% 3.2% 7.8% 6.9% 7.9% 8.5% 2.1% 2.3% 2.7% 2.5% 2.1% 2.2%OpFCF / Sales 16.6% 17.0% 10.4% 14.8% 13.5% 12.0% 11.2% 16.3% 15.9% 18.3% 15.5% 14.5% 16.1% 17.2%WCR / Sales 14.2% 14.4% 15.9% 14.0% (1.0%) (0.4%) 3.2% 5.2% 0.2% (2.4%) (8.6%) (8.5%) (8.5%) (8.6%)Capital employed (excl. gross goodw ill) / Sales 55.3% 33.2% 33.1% 30.5% 36.3% 30.2% 90.7% 14.0% 7.1% 4.1% (2.1%) 9.0% 8.9% 9.0%ROE 6.1% 7.2% 8.6% 9.2% 7.7% 9.9% 10.1% 10.0% 12.4% 11.6% 12.0% 11.3% 12.3% 12.9%Gearing 62% 42% 45% 45% 32% 35% 30% 33% 29% 12% 12% 17% 11% 4%EBITDA / Financial charges 3.3x 6.5x 6.3x 8.2x 8.8x 9.5x 6.1x 9.4x 9.6x 12.3x 14.2x 18.8x 20.5x 24.5xAdjusted f inancial debt / EBITDA 4.4x 2.4x 2.8x 2.3x 2.0x 1.8x 1.8x 1.9x 1.4x 0.7x 0.7x 1.0x 0.6x 0.2xROCE, excl. gross goodw ill 12.0% 23.1% 20.2% 26.6% 23.1% 31.9% 11.2% 77.1% NS NS NS NS NS NSROCE, incl. gross goodw ill 3.2% 4.7% 3.9% 4.8% 4.7% 5.7% 5.6% 8.6% 10.5% 10.6% 11.1% 10.3% 12.0% 13.4%WACC 8.0% 7.9% 7.9% 8.2% 7.4% 7.4% 7.6% 7.1% 7.3% 9.2% 9.4% 8.7% 8.7% 8.7%

Latest M odel update: 16 Oct. 12(a) Intangibles: GBP6,342.00m, or GBP8p per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost(c) adj.for capital gains losses, imp.charges, capitalized R&D, am. of intangibles f rom M&A, exceptional restructuring, (*) In listing currency, w ith div. reinvested, (**) also adjusted for am. of intangibles f rom M&A, or for am. of gw ill for pre IFRS year

Reuters / Bloom berg: PSON.L / PSON LN

PEARSON (Outperform)

P rice 10.2*CFP S Relative to M SCI Euro pe (P ence)408.0

1,600.0

600.0

1,000.0

1,400.0 Target P rice

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Pearson Bertelsmann Random House Penguin analyse

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Transcript of Pearson Bertelsmann Random House Penguin analyse