Texas Cuts Hurt Publishers

Publishing groups Pearson and Reed Elsevier yesterday came under pressure amid fears that one of America's biggest states was poised to cut spending on school text books for two years.

Legislators in Texas are contemplating cutting as much as 60 per cent from their planned text book spend through next year as the state attempts to balance a $10bn (£6.25bn) budget deficit.

The cut would reduce the total spend in Texas by about $300m, and could jeopardise profits at both British groups which look to the US schools market for much of their revenue. Pearson shares lost 5 per cent yesterday to 462.5p, close to 10-year lows. Reed fell 7 per cent to 400p, its lowest level in three years, while Dutch education group Wolters Kluwer shed 16 per cent.

Analysts cautioned that the budget cut was not yet a formality and may not be as severe as feared, given the politically sensitive area of education funding.

President Bush's "no child left behind" initiative has made the improvement of educational standards a priority, and analysts do not believe legislators in his home state will gladly cut classroom resources.

The governor of Texas recently said that he aimed to raise student achievement and increase spending on class room resources, while the Texas state appropriations committee has already rejected the proposed cut. "No elected politicians voted in favour of these proposals [which] suggests that the issue is considerably overdone," said Mark Braley at Cazenove.

Legislators may instead have to look at ways to reduce budgets by freezing teacher salaries and cutting bureaucracy.

As recently as last week, Pearson confidently predicted that Texas would start spending on new text books early this year. "The fear will be that cuts in Texas could be replicated elsewhere where budgets are also tight," said Paul Sullivan, an analyst at Merrill Lynch.

The uncertainty in Texas is a further blow to a sector in which sentiment and share prices have been hit this year.

School textbook sales account for between 11 per cent and 12 per cent of revenues and profits at Reed and 14 per cent and 17 per cent at Pearson, according to Merrill Lynch estimates.

Pearson in particular has made great efforts to move into the US education market. It believes the schools arena offers reliable, long term growth which can counter the more volatile nature of other assets, including the Financial Times newspaper. The FT made a loss during the past six months of 2002 as a result of the continuing slump in advertising sales.