Nearly a year after announcing the plan, Pearson has finally sold its U.S K-12 courseware business. The buyer: Nexus Capital Management, a Los Angeles-based private equity firm.
The headline value of the sale is $250 million, but the deal structure is broken down into several components. Pearson only gets $25 million in cash upfront. Nexus will pay the remaining amount—$225 million—in three to seven years. After this amount is paid, Pearson is entitled to 20 percent of future cashflow from this business. And, in the event that Nexus later sells this business (after it pays the full $250 million), Pearson will get 20 percent of the net sale proceeds.
Those terms may seem oddly complex for a business that generated roughly £364 million (approximately U.S. $470 million) in revenue and about £20 million (U.S. $26 million) in profit in 2018. One analyst told the Financial Times that “investors were unlikely to welcome the convoluted deal structure,” and said the transaction value was “more at the lower end” of expectations.
To Bill Hughes, a former Pearson executive who led the company’s product and business development efforts for nine years, the terms read “a bit like a fire sale,” he said via email. Getting rights to 20 percent of the K-12 courseware unit’s future cashflow “gives Pearson an upside if the buyer is able to improve a business [that Pearson] could not.”
In any case, Hughes, now the founder and president of Open4 Learning, added: “The sale must be a relief [to Pearson] … Maybe tighter focus will help them turn the corner.” The deal is expected to close by the end of March.
Over the years, as Pearson accelerated its shift from being a print to digital education company, it has found the U.S. K-12 courseware market slow in making the transition. “I think we have a very good K-12 courseware business and we’ve continued to invest in it,” CEO John Fallon told EdSurge in an April 2018 interview. “But it just doesn’t fit with everything else that we’re working on at the moment.”
In the announcement, Pearson framed the sale as another milestone in its “simplification strategy” that is supposed to help the company “become a simpler and more efficient company” focused on its digital businesses. Under Fallon, who assumed his role as CEO in 2013, the once-prolific publisher has divested a series of brand-name assets, including The Financial Times and its stake in The Economist and Penguin Random House. Digital tools, including the widely-used student information system PowerSchool, were also sold. Along the way, the company also shed thousands of jobs.
The assets in this sale involve the majority of the print and digital instructional resources on Pearson’s K-12 schools website, including Elevate Science, enVision Math, iLit and myView Literacy. Also being sold are tools like Realize, a single sign-on service that helps educators and students access Pearson’s digital content and assessments. Altogether, these product lines employ approximately 1,330 people, according to the company.
Pearson is not completely out of the U.S. K-12 market. It continues to run Connections Academy, a K-12 virtual school business, and will keep delivering assessments and professional certifications, where the company retains a strong foothold in the U.S.
“The sale frees us up to focus on the digital-first strategy that will drive our future growth,” Fallon said in a prepared statement. “Through our assessment, virtual school, advanced placement and career and technical education programmes, we will still serve schools across America and we will now be better placed to focus on the areas in which we can best help their students to be successful in their studies and future careers.”
The company’s struggles in the U.S. courseware business extends to higher education as well. In a financial update shared last month, Pearson warned that revenue from its U.S. higher-education courseware business could fall as much as 5 percent in 2019.
In a LinkedIn post, Fallon said Bethlam Forsa, who has been president of the U.S. K-12 courseware business since 2014, has been appointed chief executive of this group. He also noted that its new owner, Nexus Capital Management, has “a long history of investing in the education sector,” although the firm’s website is sparse on details. Nexus was founded only in 2013.
It would not be out of the ordinary for Nexus to leverage these assets as part of a roll-up strategy to acquire other education assets, as many other private equity firms have done in recent years.
