BREAKINGVIEWS-Random Penguin could fly

Fri Oct 26, 2012 5:36pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Quentin Webb

LONDON, Oct 26 (Reuters Breakingviews) - The Random Penguin could fly. Consolidation makes sense as publishers adapt to the digital era. Hence Bertelsmann and Pearson’s (PSON.L) talks to combine their Random House and Penguin imprints.

Bertelsmann, already Europe’s largest media outfit, would probably be the senior partner in any combination. Judged on operating profits and sales, a merger ratio of about 60-40 looks appropriate. Based on the trading multiples of smaller rival Bloomsbury, the house of Harry Potter, the combined group might be worth about $3.4 billion, before factoring in any extra value created through synergies.

The talks come as both publishers move rapidly to embrace e-books. At first-half results, Penguin said nearly 20 percent of sales are electronic. Publishers Weekly, a trade journal, says Random House is already at 22 percent. The latter’s “Fifty Shades of Grey”, the Kindle era’s first "bonkbuster", is particularly well-suited to the anonymity of the e-reader. That title makes half its sales electronically.

Hitched together, Random House and Penguin could accelerate into the digital age. Cost savings from the “dead tree” business, meanwhile, could be significant. UBS reckons about 30 percent of the overheads in consumer publishing are in book printing, production and distribution. Economies of scale won by the enlarged group could reduce these expenses by perhaps one-third. That implies annual savings of more than 200 million pounds – though disentangling Penguin from Pearson’s educational publishing business might complicate matters.

The combined group will also be in a better position to haggle with the industry’s new power-brokers: technology giants such as Amazon (AMZN.O) and Apple (AAPL.O), and big general retailers such as Tesco (TSCO.L). An improved global footprint – Penguin is stronger in emerging markets, Random House in Germany – might also give the group an edge in winning global rights deals with bestselling authors.

Negotiating options for a subsequent exit will be important: Pearson might insist on the right to sell its stake to its German partner at a value agreed by independent arbiters, for example.

For Pearson, under new boss John Fallon, this could be step one in a phased exit from books published outside its educational remit. It would also make Pearson’s ownership of the Financial Times look ever more incongruous.

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CONTEXT NEWS

- Pearson Plc, the British education and publishing group, said on Oct. 25 that it was in talks with Bertelsmann, Europe’s largest media group, about a combination of the duo’s publishing divisions, Penguin and Random House.

- The statement was made in response to a report in the Financial Times, the newspaper owned by Pearson, which said the unlisted Bertelsmann would take more than half of the combined venture.

- Analysts say new Pearson Chief Executive John Fallon may be willing to sell both Penguin and the FT, which would complete Pearson’s shift from a conglomerate to a focused educational services and publishing group.

- Pearson statement: link.reuters.com/ryg63t

- Reuters: Pearson eyes publishing arm merger with Bertelsmann [ID:nL5E8LPOW8]

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(Editing by Robert Cole and David Evans)

((quentin.webb@thomsonreuters.com))

((Reuters messaging: quentin.webb.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS PEARSON/BERTELSMANN

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