EQUITIES

MEDIA: OUTPERFORM

PEARSON

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

Unlocking value at Penguin

26 OCTOBER 2012
Sami Kassab
(+44) 207 039 9448

sami.kassab@exanebnpparibas.com

William Packer
(+44) 207 039 9509

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, talks between the companies are well advanced and are taking place with competition authorities. While a positive outcome is still far from certain, we consider such a move would be positive for Pearson and 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 would improve the publishers bargaining power and control over pricing in an industry where retail distribution is increasingly dominated by a few large behemoths. The combination would also broaden the geographic and product revenue base of both companies while offering meaningful cost synergies. Regulatory constraints appear manageable given the lower degree of industry consolidation 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 over USD200m of cost synergies would be available in administrative expenses, warehouses combination, printing and paper vendor consolidation. Such a move would be value-accretive (around 4% per share), boost Pearsons 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 Penguin to drive a rebound in the share price performance in the coming months.

william.packer@exanebnpparibas.com
Charles Bedouelle (+44) 207 039 9482 Nicolas Didio (+44) 207 039 9468 Adrien de Saint Hilaire (+44) 207 039 9499

media@exanebnpparibas.com

Price (25 October 2012) Market cap (GBPbn / EURbn) Free float (GBPbn / EURbn) EV (GBPbn / EURbn) 3m avg volume (GBPm / EURm) Reuters / Bloomberg Country / Sub Sector Financials EPS, Adjusted (p) EPS, IBES (p) Net dividend (p) Sales (GBPm) EBITA, Adj. (GBPm) Net profit, Adj.(GBPm) ROCE (%) Net Debt/EBITDA, Adj. (x) 12/11 86.3 86.5 42.2 5,861 891 692 11.1 0.7

1,212p 9.9 / 12.3 9.9 / 12.3 10.8 / 13.5 25.8 / 32.1 PSON.L / PSON LN UK / Professional Publishing 12/12e 84.6 84.9 45.1 6,245 920 681 10.3 1.0 12/13e 96.5 91.2 48.3 6,602 1,047 776 12.0 0.6 12/14e 107.3 97.8 51.7 6,917 1,171 863 13.4 0.2

Performance* (%) Absolute Rel. Media Rel. MSCI Europe

1w (0) 3 3

1m (2) 1 (0)

3m (3) (10) (12)

12m 7 (1) 0

* In listing currency, with dividend reinvested Valuation metrics* P/E (x) Net yield (%) FCF yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBITA (x) EV/CE (x) 12/11 12.9 3.8 8.2 1.6 9.5 10.7 1.5 12/12e 12/13e 14.3 3.7 6.7 1.7 10.9 11.7 1.6 12.6 4.0 7.6 1.6 9.3 10.0 1.6 12/14e 11.3 4.3 8.4 1.5 8.0 8.6 1.5

Please refer to important disclosures at the end of this report

* Yearly average price for FY ended 12/11

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 HearstLagardere 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 worlds 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.

PEARSON 26 October 2012

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

Revenue Underlying sales growth Growth Opex Opex growth Adj. EBITA Growth Margin 2009a 1,002 -2% 918 84 8% 2009a 1,534 -1% 1,412 122 8% Penguin financials in GBP 2010a 2011a 1,053 1,045 6% 1% 5% -1% 947 3% 106 26% 10% 934 -1% 111 5% 11% 2012e 1,065 -2% 2% 970 4% 96 -14% 9% 2013e 1,078 -2% 1% 984 1% 95 -1% 9% 2013e 1,452 -5% -5% 1,295 -5% 157 -7% 11% 2014e 1,057 -2% -2% 971 -1% 86 -9% 8% 2014e 1,423 -2% -2% 1,278 -1% 144 -8% 10% 2015e 1,038 -2% -2% 966 -1% 72 -16% 7% 2015e 1,394 -2% -2% 1,269 -1% 125 -13% 9%

Revenue Underlying sales growth Growth Opex Opex growth Adj. EBITA Growth Margin Source: Exane BNP Paribas estimates

Random House financials in GBP 2010a 2011a 2012e 1,567 1,517 1,532 2% -2% 8% 2% -3% 1% 1,419 0% 148 22% 9% 1,357 -4% 160 8% 11% 1,364 0% 169 5% 11%

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 Revenue Underlying sales growth Growth Opex Opex growth Adj. EBITA pre synergies Growth Margin Synergies Integration costs Synergies & Integration costs As % Penguin cost base As % group cost base As % group revenue Adj. EBITA post synergies Growth Margin Source: Exane BNP Paribas estimates 2009a 2,537 2010a 2,620 3% 3% 2,366 2% 254 23% 10% 2011a 2,562 -1% -2% 2,291 -3% 271 7% 11% 2012e 2,597 4% 1% 2,333 2% 264 -3% 10% 2013e 2,530 -4% -3% 2,278 -2% 252 -5% 10% 0 -189 -189 -20% -8% -7% 62 2% 2014e 2,480 -2% -2% 2,249 -1% 230 -8% 9% 49 0 49 5% 2% 2% 279 349% 11% 2015e 2,432 -2% -2% 2,235 -1% 197 -14% 8% 146 0 146 15% 7% 6% 343 23% 14%

2,331 206 8%

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 HearstLagardere magazines acquisition. Our bottom-up approach consists in an estimate of Penguins 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).

PEARSON 26 October 2012

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

As % of revenues Revenues Cost of sales of which Cost of Goods sold (incl. paper, printing, cover, etc) of which inventory provision of which royalty costs Marketing and distribution costs of which marketing expenses of which distribution fees and commission Administrative expenses of which staff cost other staff relates expenses Share-based payment charge Depreciation Premises costs Professional fees Editorial expenses Insurance Bad debt provision and write off Other TOTAL As % of Penguin Opex Source: Exane BNP Paribas estimates 100% -43% -24% -3% -16% -15% -5% -10% -30% -21% -1% 0% 0% -3% -2% -2% 0% 0% As % of opex Penguin cost Est. savings Est. savings in GBPm rate in GBPm 479.5 268.2 34.6 176.6 160.8 50.0 110.8 329.3 246.3 11.1 2.5 4.7 32.8 17.1 17.0 -5.5 3.4 10% 10% 30% 30% 30% 50% 30% 16.1 5.0 11.1 89.3 73.9 3.3 9.9 10.7 5.1 26.8 26.8

49% 28% 4% 18% 17% 5% 11% 34% 25% 1% 0% 0% 3% 2% 2% -1% 0%

10%

145.8 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 Pearsons 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 26 October 2012

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 Tradebook publishing EV/EBITA 12-month forward multiple Pearson share of newco (37% of FY14 EBIT) Current value of Penguin (Exane estimate GBP536m) Integration costs as % of runrate synergies Valuation of merged entity Tradebook publishing EV/EBITA 12-month forward multiple Value of merged entity pre-synergies NPV of post-tax synergies less implementation costs Value of merged entitiy post-synergies Current Penguin EV (average SOTP, DCF) Value of Pearson share of merged entity EV Premium to current Penguin EV Impact on Pearson p.s value Source: Exane BNP Paribas estimates 15% 7.0x 40% 536 130% 7.0x 1,761 651 2,413 536 965 80% 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 20122015e, a corporate move that would reduce Pearsons 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.

PEARSON 26 October 2012

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
Investment banking Distributor Liquidity provider Corporate links Analysts personal interest Equity stake US Law French Law Amended after Disclosure to company Additional material conflicts

NO

NO

NO

NO

NO

NO

NO

NO

NO

Source: Exane BNP Paribas Potential conflicts of interest: None. Source: BNP Paribas

PEARSON 26 October 2012

Price at 25 Oct. 12 / 12m Target Price

1,212p / 1,450p +20%

Reuters / Bloom berg: PSON.L / PSON LN
Com pany Highlights GBPm / EURm Enterprise value 10,814 / 13,455 Market capitalisation 9,902 / 12,321 Free f loat 9,902 / 12,321 3m average volume 26 / 32 Pe rfor m ance (*) 1m 3m 12m A bsolute (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 2012/2014 EPS restated (**) 4% 13% CFPS 5% 10% Price (yearly avg from Dec. 01 to Dec. 11) PER SHARE DATA (p) No of shares year end, basic, (m) A vg no of shares, diluted, excl. treasury stocks (m) EPS, company definition EPS restated, f ully diluted % change CFPS Book value (BV PS) (a) Net dividend STOCKM ARKET RATIOS P / E (P/ EPS restated) P / E relative to MSCI Europe P / CF FCF yield P / BV PS Net yield Payout EV / Sales EV / Restated EBITDA EV / Restated EBITA EV / OpFCF EV / Capital employed (incl. gross goodw ill) ENTERPRISE V ALUE (GBPm ) Market cap + A djusted net debt + Other liabilities and commitments + Revalued minority interests - Revalued investments P & L HIGHLIGHTS (GBPm ) Sale s Re s tate d EBITDA (b) Depreciation Re s tate d EBITA (b) (**) Reported operating prof it (loss) Net f inancial income (charges) A f f iliates Other Tax Minorities Goodw ill amortisation Net attributable prof it reported Ne t attr ibutable pr ofit r e s tate d (c) CASH FLOW HIGHLIGHTS (GBPm ) EBITDA (r e por te d) EBITDA adjus tm e nt (b) Other items Change in WCR Ope r ating cas h flow Capex Ope r ating fr e e cas h flow (OpFCF) Net f inancial items + tax paid Fr e e cas h flow Net f inancial investments & acquisitions Other Capital increase (decrease) Dividends paid Incre as e (de cre as e ) in ne t financial de bt Cas h flow , group s har e BALANCE SHEET HIGHLIGHTS (GBPm ) Fixed operating assets, incl. gross goodw ill WCR Capital e m ploye d, incl. gr os s goodw ill Shareholders' f unds, group share Minorities Provisions/ Other liabilities Net f inancial debt (cash) FINANCIAL RATIOS (%) Sales (% change) Organic sales grow th Restated EBITA (% change) (**) Restated attributable net prof it (% change) (**) Personnel costs / Sales Restated EBITDA margin Restated EBITA margin Tax rate Net margin Capex / Sales OpFCF / Sales WCR / Sales Capital employed (excl. gross goodw ill) / Sales ROE Gearing EBITDA / Financial charges A djusted f inancial debt / EBITDA ROCE, excl. gross goodw ill ROCE, incl. gross goodw ill WA CC 4,225 551 (125) 426 426 (261) (226) 33 (20) (375) (423) (145) De c. 01 926 (375) 321 (7) 865 (165) 700 (307) 393 (6) (302) 20 (183) 78 565 De c. 01 6,962 600 8,758 3,797 176 239 2,379 De c. 01 9.1% (0.3%) 2.8% 27.1% 29.2% 13.0% 10.1% NC (9.5%) 3.9% 16.6% 14.2% 55.3% 6.1% 62% 3.3x 4.4x 12.0% 3.2% 8.0% 4,320 615 (122) 493 493 (131) (57) (64) (22) (330) (111) (89) De c. 02 945 (330) 249 (4) 860 (126) 734 (180) 554 785 (191) 6 (183) (971) 684 De c. 02 6,142 621 7,074 3,339 192 165 1,409 De c. 02 2.2% 6.0% 15.7% 4.7% 29.4% 14.2% 11.4% 20.9% (2.1%) 2.9% 17.0% 14.4% 33.2% 7.2% 42% 6.5x 2.4x 23.1% 4.7% 7.9% 4,047 504 (111) 393 393 (80) 6 (75) (22) (264) (42) (9) De c. 03 768 (264) 214 (192) 526 (105) 421 (115) 306 (7) 11 5 (207) (108) 603 De c. 03 6,021 644 6,894 2,953 196 152 1,301 De c. 03 (6.3%) (4.0%) (20.2%) 5.7% 29.4% 12.5% 9.7% 23.5% (0.5%) 2.6% 10.4% 15.9% 33.1% 8.6% 45% 6.3x 2.8x 20.2% 3.9% 7.9% 3,919 558 (102) 456 456 (68) 9 (63) (21) (224) 89 16 De c. 04 782 (224) 140 8 705 (125) 580 (108) 472 0 (124) 4 (197) (155) 542 De c. 04 5,880 550 6,601 2,603 213 123 1,146 De c. 04 (3.2%) 2.9% 16.0% (5.6%) 29.4% 14.2% 11.6% 15.8% 2.8% 3.2% 14.8% 14.0% 30.5% 9.2% 45% 8.2x 2.3x 26.6% 4.8% 8.2% 39.5x 158% 16.1x 4.1% 2.41x 1.9% 76.8% 2.82x 21.7x 28.0x 17.1x 1.4x 11,934 9,096 2,449 51 422 84 23.5x 110% 8.3x 9.3% 1.72x 3.3% 76.8% 1.74x 12.3x 15.3x 10.3x 1.1x 7,535 5,658 1,486 149 326 84 17.8x 127% 7.5x 6.3% 1.56x 4.2% 74.8% 1.61x 13.0x 16.6x 15.5x 0.9x 6,528 4,530 1,423 354 300 80 20.6x 157% 9.1x 8.7% 1.93x 4.0% 83.3% 1.79x 12.6x 15.4x 12.1x 1.1x 7,000 4,942 1,264 354 457 17 19.0x 154% 8.0x 7.6% 1.46x 4.1% 78.8% 1.75x 11.9x 14.6x 13.0x 1.0x 7,174 5,190 1,190 354 457 18 De c. 05 4,096 601 (109) 492 496 (68) 38 (124) (20) 321 274 De c. 05 615 (14) 223 50 875 (321) 554 (123) 431 177 (281) (17) (222) (89) 654 De c. 05 6,247 (43) 7,349 3,564 169 31 1,057 De c. 05 4.5% 9.0% 8.1% 14.1% 31.1% 14.7% 12.0% 26.7% 8.3% 7.8% 13.5% (1.0%) 36.3% 7.7% 32% 8.8x 2.0x 23.1% 4.7% 7.4%

PEARSON (Outperform)
Kas s ab (+44) 207 039 9448 & Packer (+44) 207 039 9509
1 ,600.0 1 ,400.0 Target P ric e

Professional Publishing | Media (Outperform) - United Kingdom

1 ,000.0

600.0

408.0

P ric e

1 0.2*C FP S

R elativ e to M SC I Euro pe (P enc e)

1 145.3 De c. 01 800.589 794.217 28.93 28.97 27.6% 71.11 474.3 22.25

716.6 De c. 02 801.662 789.611 30.25 30.50 5.3% 86.60 416.5 23.42

575.1 De c. 03 802.388 787.665 32.01 32.32 6.0% 76.51 368.0 24.19

627.0 De c. 04 802.388 788.201 30.17 30.49 (5.7%) 68.76 324.5 25.39

653.2 De c. 05 799.000 799.000 34.33 34.33 12.6% 81.85 446.1 27.07

744.4 De c. 06 799.000 799.900 43.10 43.01 25.3% 88.72 435.0 29.30 De c. 06 17.3x 135% 8.4x 6.8% 1.71x 3.9% 68.1% 1.75x 10.9x 13.5x 14.6x 1.0x 7,706 5,918 1,287 354 457 311 De c. 06 4,393 704 (135) 570 537 (74) (22) (11) (23) 407 344 De c. 06 702 3 149 (22) 831 (302) 529 (96) 433 (367) 106 (25) (235) 88 710 De c. 06 6,399 (19) 7,376 3,476 168 29 1,145 De c. 06 7.3% 3.9% 15.7% 25.4% 27.9% 16.0% 13.0% 2.5% 9.8% 6.9% 12.0% (0.4%) 30.2% 9.9% 35% 9.5x 1.8x 31.9% 5.7% 7.4%

802.0 De c. 07 806.440 798.100 46.74 46.66 8.5% 68.99 458.2 31.60 De c. 07 17.2x 122% 11.6x 4.8% 1.75x 3.9% 67.7% 1.74x 11.3x 12.6x 15.5x 1.0x 7,356 6,468 1,158 148 313 731 De c. 07 4,218 652 (68) 584 563 (106) 0 (131) (26) 300 372 De c. 07 676 (24) 82 74 808 (335) 473 (145) 328 (7) 108 (60) (248) (121) 551 De c. 07 4,169 137 7,640 3,695 179 139 1,024 De c. 07 (4.0%) 6.1% 2.5% 8.3% 30.5% 15.5% 13.8% 28.7% 7.7% 7.9% 11.2% 3.2% 90.7% 10.1% 30% 6.1x 1.8x 11.2% 5.6% 7.6%

643.2 De c. 08 806.440 797.540 57.70 57.66 23.6% 131.39 570.8 33.80 De c. 08 11.2x 77% 4.9x 11.4% 1.13x 5.3% 58.6% 1.38x 7.8x 9.0x 8.5x 1.1x 6,649 5,187 1,616 148 401 703 De c. 08 4,811 847 (110) 737 676 (91) 2 (173) (31) 384 460 De c. 08 874 (27) 414 (69) 1,192 (410) 782 (143) 640 (290) (459) (41) (285) 436 1,048 De c. 08 5,776 252 6,028 4,603 274 531 1,460 De c. 08 14.0% 1.6% 26.3% 23.5% 28.9% 17.6% 15.3% 29.4% 8.6% 8.5% 16.3% 5.2% 14.0% 10.0% 33% 9.4x 1.9x 77.1% 8.6% 7.1%

715.3 De c. 09 806.440 797.580 65.35 65.31 13.3% 86.54 518.9 35.49 De c. 09 11.0x 80% 8.3x 11.8% 1.38x 5.0% 54.3% 1.23x 7.5x 8.3x 7.7x 1.2x 6,895 5,768 1,281 148 401 703 De c. 09 5,624 913 (85) 828 755 (95) 0 (198) (37) 425 521 De c. 09 943 (30) (6) 105 1,012 (119) 893 (168) 725 (232) 67 (25) (279) (256) 690 De c. 09 5,517 9 5,526 4,185 291 549 1,204 De c. 09 16.9% 2.3% 12.4% 13.3% 30.7% 16.2% 14.7% 30.0% 8.2% 2.1% 15.9% 0.2% 7.1% 12.4% 29% 9.6x 1.4x NS 10.5% 7.3%

962.5 De c. 10 812.677 803.003 77.20 77.02 17.9% 110.02 658.3 38.68 De c. 10 12.5x 109% 8.7x 11.3% 1.46x 4.0% 50.2% 1.42x 9.0x 9.9x 7.8x 1.4x 8,043 7,825 640 148 98 668 De c. 10 5,657 895 (82) 813 830 (85) 81 (215) (17) 594 618 De c. 10 1,017 (122) 154 120 1,169 (132) 1,037 (142) 895 170 (61) (65) (305) (634) 883 De c. 10 5,833 (136) 5,697 5,350 67 378 570 De c. 10 0.6% 5.5% (1.8%) 18.7% 32.7% 15.8% 14.4% 26.0% 10.8% 2.3% 18.3% (2.4%) 4.1% 11.6% 12% 12.3x 0.7x NS 10.6% 9.2%

1 113.5 De c. 11 817.000 801.891 86.48 86.30 12.0% 107.77 704.4 42.17 De c. 11 12.9x 109% 10.3x 8.2% 1.58x 3.8% 48.9% 1.63x 9.5x 10.7x 10.5x 1.5x 9,565 9,066 718 141 19 379 De c. 11 5,861 1,009 (118) 891 791 (52) 423 (259) 1 904 692 De c. 11 1,048 (40) 18 39 1,065 (156) 909 (162) 747 (279) (215) (39) (319) 105 864 De c. 11 6,725 (505) 6,220 5,755 19 469 675 De c. 11 3.6% 1.3% 9.5% 11.9% 33.8% 17.2% 15.2% 22.3% 15.4% 2.7% 15.5% (8.6%) (2.1%) 12.0% 12% 14.2x 0.7x NS 11.1% 9.4%

1 212.0 De c. 12e 817.000 804.810 84.75 84.55 (2.0%) 97.85 735.4 45.12 De c. 12e 14.3x 119% 12.4x 6.7% 1.65x 3.7% 53.4% 1.73x 10.9x 11.7x 11.9x 1.6x 10,814 9,902 1,041 231 19 379 De c. 12e 6,245 996 (76) 920 812 (53) 0 (182) (2) 575 681 De c. 12e 1,027 (31) 39 28 1,063 (156) 907 (246) 661 (632) 0 0 (351) 321 788 De c. 12e 7,298 (533) 6,765 6,008 19 440 996 De c. 12e

1 212.0 De c. 13e 817.000 804.937 96.69 96.46 14.1% 106.29 772.7 48.28 De c. 13e 12.6x 118% 11.4x 7.6% 1.57x 4.0% 50.0% 1.58x 9.3x 10.0x 9.8x 1.6x 10,460 9,902 687 231 19 379 De c. 13e 6,602 1,127 (80) 1,047 940 (55) 0 (212) (2) 671 776 De c. 13e 1,159 (33) 45 29 1,201 (138) 1,063 (314) 749 0 0 0 (379) (370) 856 De c. 13e 7,216 (562) 6,655 6,313 19 395 626 De c. 13e

1 212.0 De c. 14e 817.000 805.074 107.53 107.25 11.2% 117.76 817.7 51.66 De c. 14e 11.3x 117% 10.3x 8.4% 1.48x 4.3% 48.2% 1.45x 8.0x 8.6x 8.5x 1.5x 10,051 9,902 278 231 19 379 De c. 14e 6,917 1,255 (84) 1,171 1,066 (51) 0 (254) (2) 759 863 De c. 14e 1,289 (34) 50 31 1,335 (149) 1,186 (354) 832 0 0 0 (409) (423) 948 De c. 14e 7,142 (593) 6,549 6,681 19 345 203 De c. 14e

6.5% 5.7% 4.8% 1.4% 4.2% 4.9% 3.4% 13.7% 11.9% (1.7%) 14.1% 11.2% 34.6% 35.1% 35.3% 16.0% 17.1% 18.1% 14.7% 15.9% 16.9% 24.0% 24.0% 25.0% 9.2% 10.2% 11.0% 2.5% 2.1% 2.2% 14.5% 16.1% 17.2% (8.5%) (8.5%) (8.6%) 9.0% 8.9% 9.0% 11.3% 12.3% 12.9% 17% 11% 4% 18.8x 20.5x 24.5x 1.0x 0.6x 0.2x NS NS NS 10.3% 12.0% 13.4% 8.7% 8.7% 8.7% Late s t M ode l update : 16 Oct. 12 (a) Intangibles: GBP6,342.00m, or GBP8p per share. (b) adjusted f or capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost (c) adj.f or 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 f or am. of intangibles f rom M&A , or f or am. of gw ill f or pre IFRS year

PEARSON 26 October 2012

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