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CNBC Exclusive Interview: John Fallon, CEO of Pearson

Following are excerpts from the unofficial transcript of a CNBC exclusive interview with John Fallon, CEO of Pearson, on Squawk Box Europe Friday Aug 14.

Q: Pearson, who sold its stake in both the FT Group and The Economist in recent weeks, in a bid to refocus exclusively on the 3 billion dollar global education market, management has called the global demand for better skills its, quote, "biggest growth opportunity". Let's welcome on the desk, in an exclusive interview, John Fallon, the CEO of Pearson. John, great to see you. Look, we'll talk about education at length in a moment, and where you're going as a company as well. Just talk about the sale of two British jewels, really, the FT and The Economist. I've mentioned briefly off camera to you, but I'm surprised there wasn't a backlash, really, I haven't really heard backlash against selling these British institutions to interests in Italy, to interests in Japan as well… were you prepared for one?

A: I think that we have worked really hard to ensure that we've not just delivered a good deal for Pearson's shareholders, but that we found the right homes for both the FT and The Economist. Owners and proprietors who share our view in the absolute value of editorial independence and integrity and companies that will invest for the long term and that will bring the investment, the expertise, the focus, the scale of what I think will remain Britain's iconic brands for many years to come, to succeed in what I think is the next age, very interesting digital disruption in journalism.

Q: Just one more from me on that before we move on really. But I understand that The Economist has its independence editorially enshrined actually and the new owners can't really go anywhere near that, and it's not like they necessarily would, but the FT I think it's seeking more assurances … surely the journalists are seeking more assurances. Do they need that? Do they need to have some independent board that makes sure there's a gap between them and the new owners as well? Did you sell it without them getting the guarantee?

A: I think that I have made this point before, but, you know, Pearson has owned the Financial Times for 58 years, and I think that the one thing that people would say is that Pearson have been very good owners in terms of editorial integrity and independence. There is not a single word written down anywhere, of anything. And I thought long and hard about it and looked at all the deals in the sector and discussed it at length, not just with the Pearson board, but with the editorial leadership of the Financial Times as well. And the view we got was finding the right home in terms of leadership, culture, independence, track record… that's the right way, and I think that Bill Emmott had a very good piece in the FT on this point, so, clearly, Nikkei have already made a very public statement to the FT, and I think…

Q: They have, but they haven't responded to the FT journalists who have asked for more clarity on the barriers between the owners and indeed the editorial process on a daily basis. I think, that, on your point about Pearson, I absolutely, 100% agree with you. There is no word written down anywhere I've seen that says you have interfered at any stage.

A: Yes. I think that, as I say, I discussed and debated all this at some length with Lionel Barber and the senior editorial leadership of the Financial Times and I'm very confident that the deal that we have done has done the very best to meet their concerns, and, clearly, what Nikkei does in the future and how it then engages with the journalist must be a matter for Nikkei, but I think that people must take a lot of reassurance from the letter that Kita-san, the Chairman of Nikkei, has already written and given to the journalists.

Q: All right, brilliant. Let's move on, shall we? Julia, so you want to pick up on the education side? Yes, I do, actually. But first I want to pick up on the point that you said about, you know, talking to your investors and showing them that this was the right time and, what we've seen from the share price, actually, is that it has continued to fall since the sale by the price you said. You said you had great prices as well. How do you prove investors that you can come up with organic growth now, having seen less of that in the last few years, other than, you know, acquisitions and what they provide for you, and that you're not necessarily going to spend 1.3 billion Euros back in?

A: So if you look at the total shareholder returns that Pearson has delivered over the last five and last ten years, I think they've been pretty strong. And my job, our job, is to ensure that they are equally strong, if not better, over the next five to ten years, and I think that with the disposals of the Financial Times and the Economist, the way that strengthens our balance sheet, the capital that gives us to deploy over the next few years, but also all the other actions that we've been taking, so there's all significant, organic investment, all the actions were taking to rationalize and simplify the technology base of the company, all the things I believe over the next two or three years, are really going to start to come through, and I think shareholders should be very confident that the track record we've had over the last decade is going to be at least matched over the next decade.

I think the priority for Pearson has always been organic investment in the products and services, returning capital to shareholders through our dividends. If you remember, we've given shareholders 1.7 billion pounds over the last 5 years, and then looking for bolt-on acquisitions that can accelerate the growth of the company. Let me give you a couple of examples of how we've done that: Virtual schools enrolments, transforming technology in schools of 15% in the first half of this year. Online college enrolments, doing the same thing to higher education, up 24%. Neither of those things would have been possible without the acquisitions that we've made in recent years. So I'm very confident that the acquisitions we have made, and any acquisitions we do make in the future will deliver good returns to our shareholders.

Q: Aren't you, potentially, tying your future to one story, and that is, to roll out of common core, Federal programmes in the United States, the reorganisation of the US education system. You're going from having your fingers in quite a few pies to, seemingly, concentrating on more US revenues and better education systems across the US, and we know that the elite in the United States is fantastic, but there are great concerns in broader education elsewhere in the US.

A: I think we are tying our future to what I think is going to be one of the great global growth stories of the next decade. If you talk to parents in countries around the world, rich and poor, the single thing that matters to them most is equipping their kids with the skills and the knowledge to go to university, to learn English as a foreign language, because that's what's going to get them a better job and a better start in life, and that's what we're aligning Pearson to, and it's a huge opportunity for us, and we're… you know, this is a sector that it's only just emerging. You know, you mentioned in your introduction, 3 trillion pounds a year spent in education. We're the biggest education company in the world and we're barely 5 billion pounds in annual sales, so the growth opportunity here is immense.

Q: Yes, but at the moment, your assets… at the moment is concentrated in the United States. Does it stay that way or is it emerging markets, the China story, which is the big loaf for you?

A: Well, 65% of Pearson's sales are in America. We've had the fastest growth in our North American business, and the first half of this year, for the last four years, I think we're starting to see better growth again in North America and I think we can sustain that over the next few years. But I also think there's a great growth opportunity in China, in Brazil, in India, across Sub-Saharan Africa. Just look at the way education is going to transform economic opportunities there over the next few years as well.

Q: Is it just a perception that education hasn't benefited in a sense in the technological advances perhaps that we've seen in healthcare, that we've seen in other sectors perhaps, and it is kind of sexy. Education isn't sexy, so it's kind of been left behind and that's happened too in the developed world. Our education system is good enough, that perhaps we don't have to advance in the same way that perhaps the emerging markets have too.

A: I think the analogy with health is a really interesting one. And what we're starting to see now in a very exciting way is how we can apply technology to personalise and improve learning outcomes. In the same way that technology has transformed life expectancy and the like. Really really exciting thing to see. So what we're seeing for example in some of the universities that we work with, the completion rates, the pass rates, the number of students that actually graduate is going up. The productivity of the teaching profession improves, the job satisfaction improves, the costs of education come down, and so that brings better returns to our shareholders but brings better returns to our customers and communities as well.

Q: Can Pearson have a branding problem now, though? Because you have, Steve has pointed out at the beginning, got rid of two brands that you were very much synonymous with, but 38% of your revenues I believe, are text books, and to get back to the point that I've made about education, in that sense be quite boring. Even if you look at what you're doing in Brazil and what you've got in China, it's not called Pearson, is it? Does it need to be a rebranding? It's mostly English in China, isn't it, which is a well-known brand, but it's not called Pearson.

A: I've sort of smiled when you described education as boring, because yesterday I saw a whole series of kids getting their A-level results and looking at which universities they were going to go, what they were going to study. They weren't bored. It's the most exciting day of their life.

Q: I agree with that, but I think it's a perception. There's a perception.

A: I agree with that, and I think one of the things we've done over the last decade is build Pearson as the biggest global education company, but we're not as well known for that as we should be… So building Pearson now for that love and joy of learning, but also the company that more than anything else in the world helps you to get on and get the knowledge and the skills to get that better job, to have that better career, to have the, you know, the new American Dream, the new Chinese Dream, this hugely aspirational middle class that wants to get on with their lives and achieve more for their kids than they did… that, I think, is about the most exciting thing in the world anybody could be doing.

Q: Google for technology, Pearson for education. You still have Penguin, do you?

A: We still own 47% of Penguin Random House.

Q: Yes… it's on the block?

A: It's not on the block. The business is doing very very well, we're now to 12 to 18 months of integration of the two businesses to come together, Markus Dohle, the CEO is doing a fantastic job of leading and building those businesses. So that's something that maybe we'll consider somewhere in the future, but not today.