After last week's official confirmation of talks and a newsmaking
weekend overture from News Corp., Bertelsmann and Pearson made their
intended partnership official in an early Monday morning announcement
that they have agreed to combine their trade book businesses into a
single entity known as Penguin Random House. Under the deal, which is
"expected to complete in the second half of 2013" but could take some
time while awaiting regulatory clearances in multiple territories,
Bertelsmann will hold 53 percent of the new company and Pearson will
take a 47 percent stake, agreeing to hold those stakes for a minimum of
three years. Markus Dohle will be worldwide ceo while John Makinson is
to be chairman of the board, and Bertelsmann will appoint five
executives and Pearson four to the new board of directors. Until the
deal closes Penguin and Random House "will maintain their current
separate operations and continue conducting business independently." A
Bertelsmann spokesman indicated the deal was preceded by "five months of
detailed discussions."
Those percentages are more closely aligned than some had expected, at
least in part because the new entity will not include Bertelsmann's
German-language publisher Verlagsgruppe Random House. (While sales
figures are not provided separately for that unit, it is the largest
trade publisher in the world's second biggest market. We no longer know
just how big the combined company will be, but it's smaller than the $4
billion previously cited when you strip out the German sales.) RH
Germany's ceo Frank Sambeth will continue to report to Dohle. RH
spokesperson Stuart Applebaum told us the exclusion of the German
division was part of a "strategic consensus between the two partners in
the new company to invest in English- and Spanish-language publishing."
Bertelsmann, however, "will continue to invest in German-language
publishing as a 100 percent owner of VGRH [and] intends to endow VGRH
with all the resources it needs to maintain and grow its German-market
leadership."
Once the Penguin Random House deal closes, the new company, which
they say "will continue to publish their books with the autonomy they
presently enjoy, and retain their distinct editorial identities," will
comprise all the English, Spanish and Portuguese language interests of
Penguin and of Random House, as well as Penguin's operations in China
and other interests. That includes Penguin's recently-acquired Author
Solutions (whose roughly $100 million in sales has not been included as
everyone has compared the relative sizes of the companies) and other
Penguin assets such as Bookworld, the Australian ebookstore comprising
the Borders and Angus & Robertson online businesses.
As the minority partner, Pearson can "offer to sell its entire
shareholding" to Bertelsmann after three years and if their partner
declines, then Pearson can "require a recapitalization" by raising debt
equal to up to 3.5 times EBITDA, with "a dividend distributed to
shareholders in line with their ownership." Five years after the deal
closes, "either partner may require an IPO of Penguin Random House."
While some news organizations have noted the deal does not include a
breakup fee if it is not consummated, it cannot be derailed by anything
other than regulatory issues. Makinson tells us both companies
"have signed a binding undertaking" and "the only condition to closing
is regulatory approval," so Pearson's board could not abandon the deal
in favor of a cash offer from some other party. If HarperCollins is
looking to acquire more scale and has money to invest, they-- like their
other peers -- will have to look to other potential acquisitions.
(Presumably Les Moonves' phone has been ringing.)
As we hinted in calling it a "cashless sale" last week, the deal
structure should please Pearson shareholders. Once it closes, Penguin's
results will be treated as discontinued operations and Pearson will
report only their share of Penguin Random House's profits. "It will have
quite a positive effect on both the margin and balance sheet of
Pearson," Makinson said, since Penguin is lower margin business than
education for Pearson and trade publishing "employs a lot of working
capital." Makinson underscored, "there's no write-off of goodwill" at
Pearson when the asset transfer is made. While Pearson has been
supportive of Penguin with capital investment for purchases like ASI,
Makinson noted "one of the issues I thought about a lot in this
combination...is the competition for capital." He expects that "within
the Bertelsmann balance sheet we probably have a better shot at getting
access to investment capital" in the future.
In a letter to Random House staff explaining "this is the future,"
Dohle stressed "the coming together of Random House and Penguin is both a
realization of [Bertelsmann's] strategic plan for growing creative
content businesses, and further affirmation of their belief in the great
future of trade book publishing."
Echoing Makinson's words in a letter to Penguin staff last week when
the talks were first acknowledged, Dohle wrote to employees, "I
understand how difficult it is not having all of the details immediately
about our new company. In order to overcome the uncertainty for all of
you I will communicate and share with you directly and regularly as we
move toward this transition, and I will do so with complete openness and
transparency."
The key to the new joint company is, Dohle said, that "authors remain
the center of everything we do" and that they, and their agents, "will
continue to enjoy an enormous choice of publishing homes, where creative
autonomy and great resources will be a defining hallmark."
Dohle said he is "deeply convinced that the creativity and experience
of our publishers, aligned with our decentralized entrepreneurship,
will enable us – together with our new colleagues – to more completely
and immediately realize our vision to provide our content for everyone,
everywhere, in every format, and on every platform." The combined
Penguin Random House "will be able to offer a deeper, even more robust
backlist, along with our highly successful frontlist" on a global scale.
In addition, "both companies are already highly advanced and
accomplished in digital publishing, and with this new partnership we
will accelerate our digital transformation, while ensuring a strong
future for print." Dohle also wrote separate letters to agents, authors,
and booksellers, which we link to at the end of this piece.
In a separate letter to Penguin staff, Makinson said that discussions
of industry consolidation had been taking place among Penguin
management "for several years now" and as such, "we could have waited"
to make a deal. But, Makinson explained, "in any industry it's always
right to lead the process of consolidation rather than to follow. That
way you get to pick the most attractive partner and steal a march on
everyone else. I have always thought that Random House would be far and
away the best partner for Penguin, not just because of its reach and our
obvious complementarity, but because of the outstanding quality of its
publishing."
The scale of the consolidation will lead to regulatory scrutiny in
many places. Makinson told us "we know that there is quite a regulatory
compliance burden" and "we are realistic about that," though he said "we
aren't expecting there to be anything material" required for approval
since "the combined market share of the two companies falls short of 30
percent" in major territories. He added, "we wouldn't have reached this
point of announcing the transaction unless we felt some confidence in
our ability to obtain regulatory clearance."
Trickier, perhaps, is that Penguin is currently in litigation with
the US Department of Justice over ebook pricing and is the one trade
publisher in Europe that declined to settle with the European Commission
over similar issues. Makinson acknowledged that "our relationship with
Justice becomes more complicated as a result of having two parallel
inquiries" (the regulatory clearance and the ebook litigation). While
saying their position on DOJ suit has not changed and they are "not
about to settle it," Makinson admits that "we'll be giving it some more
thought" and "will sit down with our partner at Random House and try to
figure out the best way through this." (Though minor, the deal also
enmeshes Random House in the Bookish joint venture.)
Penguin's release notes the expectation that the combined
company "will generate synergies from shared resources such as
warehousing, distribution, printing and central functions" and financial
analysts have started trying to estimate the costs savings, though
Makinson emphasized to us that "the deal isn't really driven by the
costs arithmetic." He said that they will now "embark on a more careful
and granular process to think about how we achieve the benefits of
combination." Joint teams from Penguin and Random House will work
through some of those details "and Markus and I will exercise joint
stewardship of that process." Makinson said that in many ways it's an
extension of "a conversation we've been having for some time" since
"many of those decisions are going to have to be taken in any case
because of the changes from physical to digital content."
*From today's Publisher's Lunch
In further remarks, Bertelsmann ceo Thomas Rabe said in the
announcement: "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." He further added: "The combination of Random
House and Penguin, first of all, significantly strengthens book
publishing, one of our core businesses. Second, it advances the digital
transformation on an even greater scale, and third, it increases our
presence in the target growth markets Brazil, India and China."
Pearson ceo Marjorie Scardino, who is leaving the company at the end
of the year, stated: "Penguin is a successful, highly-respected and
much-loved part of Pearson. This combination with Random House--a
company with an almost perfect match of Penguin's culture, standards and
commitment to publishing excellence--will greatly enhance its fortunes
and its opportunities. 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."
Dohle, who will run the day-to-day operations of Penguin Random
House, said as part of the joint statement: "Our new company will bring
together the publishing expertise, experience, and skill sets of two of
the world's most successful, enduring trade book publishers. In doing
so, we will create a publishing home that gives employees, authors,
agents, and booksellers access to unprecedented resources. I deeply
believe that the support and services that we will be able to offer,
coupled with the creative and editorial independence that we will
continue to maintain, will benefit everyone in the book publishing
environment, especially our passionate readers from today's generation
to the next."
Dohle Letter to Agents
Dohle Letter to Authors
Dohle Letter to Booksellers
Dohle letter to staff
Makinson letter to staff
* from today's Publisher's Lunch
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