Pearson sells FT titles after 58 years

Pearson's largest disposal in five years values the FT Group at 2.5 times its revenues of £334m in 2014, and 35 times its operating income. The deal doesn't include its stake in The Economist Group - which it is also looking to sell and is estimated to be worth around £400m - or the FT's riverside offices at One Southwark Bridge in London. Management expects the deal to close by the year end, and plans to use the proceeds - which analysts peg at close to £630m after tax and pension payments - to make acquisitions and invest in the core education business. Amid rapid growth of mobile and social media and mounting pressure on print publishing, they think the Financial Times has the best shot at success as part of a global media company. Its buyer's flagship publication, The Nikkei, is Japan's most-read business newspaper with over 3.1m subscribers.

The downside for Pearson is the loss of a lucrative asset and global brand. Global paid circulation of the Financial Times - the largest publication within the portfolio - rose 9 per cent to 737,000 across print and online in the six months to 30 June, and its digital user base swelled 14 per cent to nearly 520,000. This contributed towards a slight increase in sales at the FT Group, as strong demand for digital content offset falling sales of print content and advertising.

News of the FT deal threatened to overshadow Pearson's results, particularly as the business is heavily weighted to the second half: first-half sales made up less than half of group revenue in 2014 and only a tenth of adjusted operating profit. But there were a few surprises: underlying sales rose 3 per cent in the group's largest market, North America, due to strong demand for online degrees and virtual schooling. That was despite a slew of missteps and stiff headwinds reported across the pond in recent months: New York authorities dropped the group as the state's testing vendor following complaints over the validity of exam questions; a Los Angeles school district is demanding a refund after rolling out more than 650,000 iPads with Pearson's software installed, claiming it doesn't work; fewer than 10 US states now rely on PARCC - a key customer that helps design national exams - compared with 26 in 2010; and it lost out on about $440m (£284m) in work after existing contracts in Florida and Texas came up for renewal.

Pearson's defiant performance in North America, combined with its continued investment in digital content and services and expansion into fast-growing markets, drove constant-currency sales up 1 per cent to £2.2bn. But underlying sales slid 5 per cent in its developed markets due to lower print sales of the FT and a weaker tailwind from changes to UK curricula. And sales were flat in the group's growth markets, primarily due to lower textbook sales and fewer college enrolments in South Africa. Together with rising costs, that pushed the group's underlying operating profits down 4 per cent to £72m.

Pearson's joint ventures were bright spots. The Economist Group's earnings contribution rose as circulation of the financial news magazine remained steady at 1.6m and there was a 57 per cent rise in subscribers choosing digital packages. Meanwhile, Penguin Random House contributed £24m in adjusted operating profit - an increase of a third - as the consumer book publishing giant cashed in on international bestsellers such as The Girl On The Train and Grey. Titles such as Go Set A Watchman - the long-awaited follow-up to Harper Lee's To Kill A Mockingbird - are expected to fuel further growth this year.

Management reaffirmed EPS guidance of 75p to 80p - ignoring the disposals of its PowerSchool software business and the FT Group - up from 67p in 2014. Broker Liberum expects Pearson's testing troubles to drag EPS down by 3p to 4p in the year to December 2016. It forecasts pre-tax profit of £695m this financial year, giving EPS of 71.2p (FY 2014: £601m and 60p).