For about 36 intense hours between Saturday night and Monday morning, it looked as though the genteel world of book publishing was about to be shaken not only by its biggest merger proposal but by a potential hostile bid battle.
After Pearson, the owner of Penguin, the Financial Times and a host of education businesses, confirmed an FT story that it was in talks with Bertelsmann to merge Penguin and Random House, Rupert Murdoch made one of the swift, opportunistic moves for which he is well known.
Mr Murdoch’s News Corp, he intimated to the Pearson board, could be interested in a full-blown takeover to add Penguin to its HarperCollins publishing unit rather than the joint venture with Bertelsmann it had spent five months negotiating.
He named no price, but the whiff of a rival deal derailing their plans was enough for Pearson and Bertelsmann to work through the night to announce their deal about a week early, in terms that made clear that Mr Murdoch would not be welcome.
Random House was a company with “an almost perfect match of Penguin’s culture, standards and commitment to publishing excellence”, said Marjorie Scardino, Pearson’s outgoing chief executive.
Neither company put figures on the cost savings and other benefits they expect from the combination, which would bring such diverse authors as Jane Austen and EL James under one roof.
But Dame Marjorie said they would “be able to take out a lot of costs”. The two companies made clear that one reason Pearson’s board had not waited to see whether a formal News Corp bid might emerge was the prospect that a sale would trigger a large capital gains tax bill in the US, which accounts for more than half of Penguin’s revenues.
Instead, both companies argued, the joint venture would allow them to share in the benefits of creating a company that could redeploy savings into investment in authors and the technology increasingly needed for them to reach readers.
Conscious of the possible concerns about a much-enlarged market leader with a 25 to 30 per cent share of most large countries’ book sales, they stressed that they did not expect those savings to come from closing or combining Penguin or Random House imprints such as Viking or Knopf.
Markus Dohle, the Random House CEO, said: “The idea is to preserve the small-company culture and feeling on the editorial side.”
John Makinson, the Penguin CEO, added: “I have no doubt that some authors, agents and customers will express concern to many of us that this merger will reduce choice and competition. I believe, and so I know does Markus, that exactly the opposite will happen.”
Both executives wrote to authors, agents and booksellers to reassure them about a deal that will require approval from regulators in several markets.
Several details remain unclear, but the two groups spelt out the broad structure of the agreement under which Pearson could in time sell its 47 per cent minority stake, which people close to the deal said had been arrived at based on a valuation of about €3bn for the combined business.
The two companies agreed not to sell any of their stakes in Penguin Random House for three years.
After that, Pearson could demand a recapitalisation in which the venture would fund a special dividend by raising debt equal to 3.5 times its earnings before interest, tax, depreciation and amortisation, which one person close to the talks estimated would be about $450m.
That debt would appear on Bertelsmann’s balance sheet, but not on the balance sheet of Pearson, which would treat Penguin Random House as an associate in its accounts, effectively making it expensive for Bertelsmann not to buy Pearson out. After five years, either partner could require an initial public offering.
“We have the firm intention not only to hold onto our interest in this business, but also to increase our stake in it if and when possible,” said Thomas Rabe, Bertelsmann’s CEO.
Dame Marjorie told staff that the deal had been driven by the “tumultuous change” in the consumer publishing industry, and by a desire to “have the pick of the partners” at the dance of consolidation rather than be “left on the sidelines hoping that somebody would get around to asking us before the last dance.”
Serious opposition by regulators could give Mr Murdoch a second chance to cut in. But by waiting for such an opportunity at a time when analysts believe that the Penguin Random House deal will trigger other book mergers, he could risk missing out on other dance partners.
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