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News

Pearson’s Big Paydays Defy the Odds Against Print Media

It has been tough sledding for print media. More than 150 newspapers have closed or converted to digital-only offerings in the last two years. Recently the magazine giants Condé Nast and Time Inc. have both cut employees and closed magazines. 

What, then, to make of the recent sales of The Financial Times and The Economist for sky-high prices?

In July, to sharpen its focus on textbook publishing and testing, the British media company Pearson agreed to sell The Financial Times to Nikkei, an employee-owned Japanese publisher, for about 855 million British pounds, or about $1.3 billion, in cash. Pearson had owned The Financial Times for 58 years. Then, in August, Pearson sold its 50 percent stake in the Economist Group, publisher of The Economist, for £469 million, or about $715 million, to the Economist Group itself and to Exor S.p.A., the investment arm of Italy’s powerful Agnelli family.

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Nikkei paid $1.3 billion for The Financial Times newspaper, which has combined paid print and digital circulation of 690,000, according to the company.

Nikkei to Buy Financial Times From Pearson for $1.3 BillionJULY 23, 2015

  The transactions turned heads, not only in media circles, but also on Wall Street. Nikkei paid 44 times The Financial Times’s operating profit. Exor paid 15 times the Economist Group’s operating profit. By contrast, Gannett, owner of USA Today and the largest public newspaper publisher, trades at about five times trailing cash flow, as does McClatchy, another large newspaper group.

Both buyers are exultant. In an interview, John Elkann, Exor’s 39-year-old chairman, said that he started reading The Economist as a teenager. Over the last five years, he said, Exor’s sliver of equity, which increased to 43.4 percent in the deal, has given him insight into the power of the brand and its annual operating profit of about £65 million.

“If you have a distinct journalistic offer, which is independent; if you have a readership, which is growing in the world because more people want to be informed and speak and read English; and if you have technology that can help you reach much more of them than you could in the past, the combination of that, if well executed, is pretty powerful,” Mr. Elkann said of The Economist.

For his part, Tsuneo Kita, the Nikkei chairman, said in an email that for three years, he had wanted a partnership with The Financial Times for access to an important English-language business publication. Buying The Financial Times also gave Nikkei a way to diversify its aging 2.7-million subscriber base. In an auction conducted by Gregory Lee, a media banker at Evercore, Nikkei not only bested the German media company Axel Springer, it also outbid buyers like Bloomberg L.P. and Thomson Reuters, as well as private equity firms and assorted billionaires.

Mr. Kita wants to build the world’s premier business media company. “It is precisely because there is a flood of information every day that there is demand for trustworthy, accurate and insightful reporting,” he explained. He says the news business is in a period of “momentous change” and thinks both Nikkei and The Financial Times can thrive by keeping their independence, while learning from each other. “English is the premier business language of today, and The FT has a 127-year history of excellent reporting in this language,” he wrote. Nikkei is 139 years old.

At these prices, though, there is no guarantee that either buyer will make money on its investment. The newspaper business could be in the process of either a long-awaited turnaround or simply another downtick. Nikkei is borrowing the money for The Financial Times from a consortium of Japanese banks, albeit at historically low interest rates.

Despite these risks, The Financial Times’s successful auction was fueled by the combination of its brand and its success in its digital business, Mr. Lee, of Evercore, said. In the last decade, The Financial Times’s digital subscribers have increased to about 535,000 from 76,000; a majority of its about £300 million in revenue comes from subscribers, not advertisers.

John Ridding, chief executive of The Financial Times, said in an interview that the newspaper’s gamble in charging a high price for premium content, both in print and online, had paid off. And neither he nor his colleagues wanted The Financial Times to become some billionaire’s toy — it had to continue to be a relevant media property. “Some people thought that this was a trophy buy,” he said. “I think the answer to that is firmly no.”

In the end, Nikkei wanted The Financial Times more than Axel did, offering about £90 million more, according to people briefed on the deal. “They would have been prepared to go even higher,” Lionel Barber, editor of The Financial Times, said in an interview.

Nikkei’s intention of keeping The Financial Times editorially independent and in London was an important consideration for the Pearson executives. “In terms of our editorial output, we will be distinct and distinctly pink,” Mr. Barber said, referring to the paper’s newsprint color. Editorial independence remains a bone of contention, and nearly 250 Financial Times journalists have signed a petition demanding that Nikkei formalize its pledge on the matter.

There will be some joint reporting initiatives — The Financial Times is planning a special section called Japan and the World and will provide content for Nikkei’s TV operations. There will also be joint conferences and swaps of small groups of journalists. Other than that, Nikkei will, at least for now, allow The Financial Times to keep its profits and reinvest them in the business.

Still, there will be considerable pressure on Financial Times management to make the deal pay off financially for Nikkei. That was among the points Mr. Barber made during a contentious staff meeting on Oct. 29. After eight hours “of intimate contact,” Mr. Barber said, with Mr. Kita in Tokyo to discuss the newspaper’s business plan and several “still secret” editorial initiatives, he had a clear message: “New owners, new partners but the same FT.” It’s this “editorial independence, ladies and gentlemen,” he said, “that underwrites the amazing price that Nikkei paid for The FT: 44 times earnings. That is a very handsome and generous price.”

Mr. Barber said he was deeply involved with the sale process. “This could have gone really badly, really badly,” he said at the staff meeting. “I mean I’ve got nothing against the Qataris. It’s hot and it shouldn’t be a place where you play football, especially the World Cup. I don’t like Russian owners of the media. And I’m not too keen on trade buyers in America who would have just swallowed up the FT. As for the Germans, I speak German fluently, I did at university but frankly” — and here he turned to Mr. Ridding — “he’s too polite to say this but they would have come in and they would have torn up our business model.”

Mr. Barber then broached the sensitive topic of the anguish felt by about 240 of The Financial Times’s most senior and well-known journalists, as well as other employees, because their generous pensions — thanks to Pearson’s benefit plan — might be reduced up to 40 percent as part of the sale.

“I understand that there are people in this room and their families who thought that they had a secure future based on a certain income, and these people face serious financial damage,” Mr. Barber said. “There’s going to have to be some redress, but it’s complicated.”

The National Union of Journalists, headed by Steven Bird, a longtime Financial Times editor, has demanded that Mr. Ridding agree to fund the pension plan at the same £15 million level as in years past; Mr. Ridding would commit only to funding the pension at £11 million. “There’s a lot of anger,” Mr. Bird told Mr. Ridding.

On Nov. 19, to show the depth of that anger, 92 percent of union members who got a paper ballot voted to strike. For now, though, thanks to a new proposal from Financial Times management that the £4 million shortfall be restored for one year, union leaders have decided not to strike, and instead, on Dec. 3, will call a mandatory meeting of members. “Nikkei have made it very clear to FT managers that they absolutely do not want a strike on the day of the takeover,” Mr. Bird wrote in an email. Nikkei is scheduled to complete its purchase on Nov. 30.

Things are calmer at The Economist. The sale of Pearson’s 50 percent stake in the newspaper, which it had owned since 1928, is only the second significant ownership change in 172 years. Exor’s purchase of 60 percent of Pearson’s shares (the Economist Group bought the rest) will make it the largest single shareholder in the Economist Group, which also includes Roll Call and Congressional Quarterly.

Like Pearson, despite the size of its stake, Exor will not control the group’s board of directors. That privilege remains with a distinguished group of British investors, including the Rothschild, Cadbury and Schroeder families, who bought into the company in 1929. Lynn de Rothschild, a telecommunications investor and the wife of Sir Evelyn de Rothschild, has been on the Economist Group’s board for 12 years.

Sounding like Mr. Kita of Nikkei, Ms. de Rothschild said in an interview that the prospects for the Economist Group had never been better, given the Economist’s ongoing commitment to “editorial independence” and the growing number of English speakers worldwide. “It’s a wonderful privilege to be an owner of The Economist,” she said. “I think The Economist has a really unique role in the world.”

The high prices Pearson received for The Financial Times and The Economist have created a new problem for Pearson’s management, according to Claudio Aspesi, a senior research analyst at Sanford Bernstein in London. “They sold them for fantastic prices,” he said in an interview. “But that creates a pool of cash, which will have to be reinvested, and in the meantime, they’ve lost the earnings of those properties.”

At this point, he said, with Pearson’s stock down by a third in the past month, investors want to know how Pearson will reinvest that cash. Will it invest the windfall, as it did in the past, in something like the successful Wall Street English, a group of 425 immersive English-language learning centers, or in something like the Nook, the disastrous digital book reader? “People don’t know,” Mr. Aspesi said, “and they are justified in being somewhat skeptical.”