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Oct. 29 (Bloomberg) — Pearson Plc agreed to combine its Penguin book-publishing unit with Bertelsmann SE’s Random House as the media companies seek to bulk up in response to a surge in providers of electronic books.
The joint venture, to be called Penguin Random House, will be 53 per cent owned by Guetersloh, Germany-based Bertelsmann, and London-based Pearson will own the rest, according to a statement from the companies today. Pearson will nominate four directors to the board and Bertelsmann five.
The companies are seeking to cut costs as the increasing popularity of e-books allows authors to test new ways of getting books published, boosting the negotiating power of large e-book sellers such as Amazon.com Inc. Rupert Murdoch’s News Corp., owner of the HarperCollins publishing house, has also expressed interest in buying Penguin, according to a person familiar with the matter.
“Penguin was always going to be a drag on organic growth, no matter what,” said Claudio Aspesi, an analyst at Sanford C. Bernstein Ltd. in London with an “outperform” rating on Pearson shares. “Pearson through this structure is not able to totally divorce itself from the risk, but probably this is as good a deal as they could hope to get.”
Penguin and Random House had combined sales of about 2.5 billion pounds ($4 billion) and operating profit of 272 million pounds last year. A merger could reduce the publishers’ estimated combined cost base of 2 billion pounds by 2 per cent to 3 per cent, according to Alex DeGroote, a media analyst at Panmure Gordon & Co. in London.
Pearson fell 0.3 per cent to 1,217 pence at 8:21 a.m. in London, giving it a market value of 9.94 billion pounds and paring its gain in the past 12 months to 3.5 per cent. Bertelsmann is closely held by the Mohn family, descendants of Carl Bertelsmann, who founded the company in 1835.
“Assuming a valuation of roughly 1 billion pounds for Penguin, Pearson’s 47 per cent stake in the joint venture is a surprise,” said Pavel Govciyan, an analyst at Natixis Securities in Paris. “For Pearson the deal is better than expected.”
The joint venture’s chief executive officer will be Markus Dohle, the current CEO of Random House, and Penguin CEO John Makinson will be its chairman. The companies said they expect to close the deal in the second half of next year.
Bertelsmann CEO Thomas Rabe, who took over in January, is looking for acquisitions to reduce the company’s dependence on Europe and expand its digital businesses.
The venture will exclude Bertelsmann’s trade publishing business in Germany and Pearson will keep rights to use the Penguin brand in education titles, a market it is seeking to focus on.
There is no breakup fee included in the Penguin-Random House agreement. “After five months of detailed discussions both sides are firmly committed to this transaction and saw no need for one,” said Christian Steinhof, a Bertelsmann spokesman.
News Corp. has expressed interest in acquiring Penguin and is preparing an offer for the business, said a person familiar with the matter, who asked not to be identified because the discussions are private. Penguin is valued at 1 billion pounds by News Corp., the Sunday Times reported yesterday. The newspaper is owned by New York-based News Corp.
Pearson also reported sales increased 5 per cent in the first nine months of the year, while profit declined 5 per cent. The company reiterated its full-year forecast for growth in sales and profit at constant exchange rates.
–Editors: Ville Heiskanen, Thomas Mulier
To contact the reporters on this story: Amy Thomson in London at [email protected]; Joseph de Weck in Berlin at [email protected]
To contact the editor responsible for this story: Kenneth Wong at [email protected]