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Britain's Pearson
and Germany's Bertelsmann plan to merge their publishers Penguin and
Random House, aiming to gain the upper hand in their relationship with
Amazon and Apple, the leaders in the ebook revolution. |
Education and media publisher
Pearson said on Monday the joint venture - which will bring under one
roof fantasy novelist Terry Pratchett, "Fifty Shades of Grey" author EL
James and 2012 Nobel prize winner Mo Yan - would be named Penguin Random
House.
Confirmation of a deal came
after months of Pearson board discussions and despite an informal
approach from Rupert Murdoch's News Corp, which was interested in
combining Penguin with its own Harper Collins publishing unit, a person
familiar with the situation said.
News Corp declined to comment.
"The
consumer publishing industry is going through a period of tumultuous
change, propelled by digital technologies and the giant companies that
dominate them," Pearson Chief Executive Marjorie Scardino said in an
email to staff.
"The book
publishing industry today is remarkable for being composed of a few
large, and a lot of relatively small companies, and there probably isn't
room for them all - they're going to have to get together."
Under
the plan, Bertelsmann will own 53 percent of the venture and nominate
five directors to the board, while Pearson would own the rest and
nominate four. Both must retain their stakes in the venture for at least
three years.
Penguin chairman and
CEO John Makinson will be chairman of the new venture, and Random House
CEO Markus Dohle will be its chief executive.
"We
will have more than 250 imprints in this company," Dohle said in an
interview with Reuters. "We want to preserve and give those imprints
even better and richer resources."
The closing of the transaction is scheduled to take place in the second half of 2013, following regulatory approval.
Analysts
said they would have preferred a bid from a group such as News Corp,
which would have brought cash into the company and enabled Pearson to
quit a market that has been hit by the rapid growth of the ebook and the
control it has given to major distributors such as Amazon, Apple and
Google.
Pearson, however, said the
merger would provide significant synergies and the opportunity to spend
more on the new technologies transforming the industry.
"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," Scardino said.
The
two groups said they would save money on joint warehousing,
distribution, printing and central functions. They gave no details but
UBS estimated possible savings of 10 percent of their combined cost
base.
A joint venture will also
allow Pearson to retain a link between its education division and the
world-renowned Penguin brand. It also avoids a large tax bill in the
United States which would have been incurred had Penguin Books been
sold.
"We can see why Pearson has
chosen this option, but there may be some disappointment there is no
outright sale, and especially with the lock-in of the stake," Liberum
Capital research group said.
BIGGEST PLAYER
In
the first nine months of 2012, Random House was the biggest book
publisher in the two major English language markets of the United States
and Britain. It was buoyed by the huge success of the "Fifty Shades"
trilogy of novels, which sold more than 30 million copies between March
and June, evenly divided between the trade paperback and ebook editions.
Penguin was second in the U.S. and third in Britain, behind Hachette.
Mike
Shatzkin, founder and CEO of book research consulting firm Ideal
Logical, said a tie-up would make the joint venture by far the biggest
player in the market.
"This is
about negotiating power," Shatzkin said. "Random House and Penguin will
have so many of the most important books, it's hard to see how any
retailers can live without them."
Under
the agreement, Pearson said it could sell its stake to Bertelsmann
after three years, but if Bertelsmann declined to buy, the joint venture
could raise debt to pay both sides a dividend. Either side could
require a stock market flotation after five years.
Pearson
will include its 47 percent share of the joint venture's profit after
tax as an associate in its consolidated statement. While the 47/53 ratio
is favorable to Pearson, given the size of the two publishers, the
joint venture excludes Bertelsmann's German trade publishing business.
Shares in Pearson were flat at 1,222 pence at 1550 GMT, in line with the broader London market.
On
October 3 Scardino said she would step down at the end of 2012 after 16
years, prompting analysts to wonder if the group would sell off its
last remaining media assets and focus on its dominant education arm.
Many, however, had focused on whether Pearson would sell the FT Group, which publishes the Financial Times newspaper.
"Basically
what people are really hoping for is (clarity) with the FT because
that's the family silver and that would show they really have changed. I
think they're seeing how it goes. One thing at a time," a top 50
Pearson shareholder said.
Bertelsmann,
Europe's biggest media group and owner of European TV broadcaster RTL
Group, is also in the middle of an overhaul to catch up with rapidly
changing markets.
Random House is
strong in Britain and the United States, while Penguin - founded in 1935
by publisher Allen Lane, who decided the mass market needed cheap
paperbacks after finding nothing to read at a railway station - is the
world's most famous publishing brand, with a strong presence in
fast-growing developing markets.
Both
groups have had to invest in the launch of ebooks. They made up 22
percent of Random House's global business in the first half of 2012,
compared with around 20 percent for Penguin.
Analysts say regulators will want to look at the tie-up to ensure it complies with antitrust laws.
"I
don't think they're going to be anxious to approve it. They'll have to
think about it and think about where the industry is going and whether
this is a necessary response," said Bert Foer, head of the American
Antitrust Institute think tank, formerly of the Federal Trade
Commission's Bureau of Competition, and father of three published
authors.
In 2011, Random House had
revenues of 1.5 billion pounds ($2.4 billion) and operating profit of
161 million. Penguin reported revenues of 1 billion pounds and operating
profit of 111 million.
Pearson
also published a trading update, showing sales up 5 percent in the first
nine months but operating profit down 5 percent, reflecting the sale of
assets, acquisition costs and weakness in the British professional
training market.