(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
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- 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
In the pink [ID:nL1E8L46GE]
Off the books [ID:nL2E8FBA83]
- For previous columns by the author, Reuters customers can
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(Editing by Robert Cole and David Evans)
Keywords: BREAKINGVIEWS PEARSON/BERTELSMANN
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