News of the possible merger between Random House Publishing and Penguin has prompted a couple of notes from brokers on Pearson.

Alex DeGroote, Analyst at Panmure Gordon

DeGroote has a 'hold' recommendation and 1,300p price target, saying: "We see this potential deal as a defensive industry merger, based on increased scale and cost synergies, but not overly material to the investment case."

He adds: "Pearson is one of the worst performing mid/large UK media caps this year. Earnings momentum has been negative as a result of increased profit and loss spend, and the net effect of Pearson mergers and acquisitions. However, at these levels there should be some yield support for the shares. In terms of the break-up, we imagine the market expected corporate activity around the FT, rather than Penguin."

Steve Liechi, Analyst at Investec

Liechi maintains his 'hold' rating and 1,240p target price, saying: "We view this as a possible net positive but not a game changer - while we see some earnings per share upside via near-term merger/cost synergies in a pressured top line business, this does not imply cash returns to shareholders or re-investment in long-term growth Education assets."

Matthew Walker, Analyst at Nomura

He retains a 'reduce' rating and a target price of 1,250p, saying: "On balance we would see this as good news for Pearson for several reasons:

1) Investors and analysts don't like the consumer books industry which has low or no growth, high capital intensity and low margins. It has an uncertain structural future in the face of e-books and self publishing. The exit multiple for anyone buying into books is very uncertain.

2) The sales of Random House are around £1.4bn versus Penguin's sales of around £1bn, providing a reason why Bertelsmann might have a majority of the possible joint venture. Depending on certain factors, this might allow Pearson to deconsolidate Penguin. With negative organic growth, Penguin by our calculations represents a drag on organic growth of around 50 basis points.

3) There may be synergies in combining the two companies in marketing, staffing, warehousing and printing and distribution. In our view, the downside is that a joint venture is not as good as a sale, suggesting there may not be a bidder at the price required for the Penguin asset. We will review our forecasts if and when a transaction is announced and terms become clearer."



CM

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