Pearson and Bertelsmann plan to combine their Penguin and Random House trade publishing businesses to form the world’s largest book publisher. The deal will be subject to regulatory approval and is expected to close in the second half of 2013. The combined firm will be called Penguin Random House, the companies announced in separate statements this morning.
Penguin Random House will be led by Markus Dohle and John Makinson. Dohle, the current Random House chairman and CEO, will be the CEO of Penguin Random House. Makinson, the current Penguin chairman and CEO, will be chairman of the board. Bertelsmann will own 53% of Penguin Random House and Pearson will own 47%. The two companies together would have about 9,000 employees. The agreement wouldn’t include certain assets, like Random House’s Germany-based trade publishing unit; and Pearson would retain the right to use the Penguin name and logo in its education business, according to the New York Times.
In the statements, Bertelsmann chairman & CEO Thomas Rabe spoke of the new firm’s size and scope, “With this planned combination, Bertelsmann and Pearson create the best course for the future of our world-renowned trade-book publishers, Random House and Penguin, by enabling them to publish even more effectively across traditional and emerging formats and distribution channels. It will build on our publishing tradition, offering an extraordinary diversity of publishing opportunities for authors, agents, booksellers, and readers, together with unequalled support and resources.”
The combined company will be able to make more investments and take more chances, according to Pearson CEO Marjorie Scardino.
“Together, the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers,” she said in the statements.
One benefit of a combined firm not discussed in the statements would be more negotiating power with the company’s largest trading partner, Amazon.
“They’ll wield far more power versus Amazon together than they did apart,” said Chris Rechsteiner, a Chicago-based publishing consultant and Digital Book World expert blogger. “However, this still won’t be enough until they can meaningfully and directly connect authors and readers.”
In 2011, Random House reported revenues of £1.48 billion ($2.38 billion) with £161 million in profit. Penguin reported revenues of £1 billion ($1.61 billion) with profits of £111 million. Pearson said in its statement that “the combined organisation’s level of organic investment in authors and new product models will exceed the total investment of Penguin and Random House as independent publishing houses.”
Rumors of a deal were first reported earlier this month by Germany’s Manager Magazin. Last week, the two companies confirmed that there had been merger talks. The deal was a well-kept secret, however, from competitors — as recently as this past weekend, sources at HarperCollins parent company News Corp indicated the company’s interest in acquiring Penguin.
“Since News’ affection for another firm was unrequited, I would bet half a nickel that talks will soon commence, if they haven’t already, with Simon and Schuster or another company, to join HarperCollins,” said Peter Brantley, a policy analyst at the Internet Archive, a San Francisco-based not-for-profit dedicated to building a library of the Internet.
The rise of e-reading and ebooks has fundamentally changed the trade publishing business and companies like Penguin and Random House have been grappling with that change, migrating many of their revenues to digital publishing and building bigger international businesses.
In its statement, Pearson said that a review of long-term publishing trends led both companies to conclude that future success depended on a “partnership with another major international publishing house,” giving the new company the size and scale to make continued investments in content, explore new digital business models and to enter into emerging markets. The organizations will also share synergies by sharing resources such as warehousing, distribution, printing and centralized business functions, the statement said.
The Pearson statement goes on to claim further benefits for the company’s stakeholders: readers, who will have access to more content in more formats; authors, who will get more and better service; employees, who will be part of a larger, deeper company; and shareholders, who will realize value in the consolidation of costs.
Random House’s Dohle sent a letter to agents, another stakeholder, this morning, explaining the merger.
“You and your clients will benefit from an extraordinary breadth of publishing choices, and editorial talents and experience,” he said, going on in more detail.
The companies remain competitors today, he also pointed out, and will continue to act as such until the merger is approved and closed in 2013.
Dohle also sent a letter to Random House employees, assuring them that the identities of the companies’ imprints will remain.
In a letter to Penguin employees, Penguin’s Makinson said that the merger would take years to take effect but that he and Dohle will begin working on the plans for the new company now and that, “we will integrate only where we think it really makes sense and we’ll make every effort to choose the best person for each job in the combined company.”
Looking ahead to the futures of the firms, if the merger is approved, neither Bertelsmann nor Pearson will be allowed to sell its stake in the company for three years following closing. If Pearson wants to sell its stake in the copmpany and Bertelsmann, as majority shareholder, declines, then Pearson may demand a recapitalization of the company, raising debt of about 3.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization, an approximation of a company’s cash flow), which will be distributed to shareholders as a dividend. Five years into the deal, either Pearson or Bertelsmann can take the company public.
If the merger is approved, it would be part of a larger trend of financial activity and consolidation in the publishing industry. Late last year, HarperCollins acquired the largest Christian publisher in the U.S., Thomas Nelson. There has also been increased M&A activity in the publishing technology market among companies like Aptara, R.R. Donnelly, Kobo and OverDrive.
“It’s likely that we’ll further consolidation and those that resist may be in even worse shape,” said Ned May, lead analyst at Outsell, a research firm focused on the publishing industry based in Burlingame, Calif. “In many ways, it signals the transition of the industry.”