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PENGUIN AND RANDOM HOUSE TO COMBINE CREATING THE WORLD'S LEADING TRADE PUBLISHER; PENGUIN RANDOM HOUSE
London and New York — Pearson and Bertelsmann today announce an agreement to create the world's leading consumer publishing organisation by combining Penguin and Random House.
The combination brings together two of the world's leading English language publishers, with highly complementary skills and strengths. Random House is the leading English language publisher in the US and the UK, while Penguin is the world's most famous publishing brand and has a strong presence in fast-growing developing markets. Both companies have a long history of publishing excellence, and both have been pioneers in the dramatic industry transformation towards digital publishing and bookselling.
Under the terms of the agreement, Penguin and Random House will combine their businesses in a newly-created joint venture named Penguin Random House. Bertelsmann will own 53% of the joint venture and Pearson will own 47%. The joint venture will exclude Bertelsmann's trade publishing business in Germany and Pearson will retain rights to use the Penguin brand in education markets worldwide.
Bertelsmann will nominate five directors to the Board of Penguin Random House and Pearson will nominate four. John Makinson, currently chairman and chief executive of Penguin, will be chairman of Penguin Random House and Markus Dohle, currently chief executive of Random House, will be its chief executive.
In reviewing the long-term trends and considerable change affecting the consumer publishing industry, Pearson and Bertelsmann both concluded that the publishing and commercial success of Penguin and Random House can best be sustained and enhanced through a partnership with another major international publishing house. They believe that the combined organisation will have a stronger platform and greater resources to invest in rich content, new digital publishing models and high-growth emerging markets. The organisation will generate synergies from shared resources such as warehousing, distribution, printing and central functions. Pearson and Bertelsmann intend that the combined organisation's level of organic investment in authors and new product models will exceed the total investment of Penguin and Random House as independent publishing houses.
The two companies believe that the combination will create a highly successful new organisation, both creatively and commercially, with the breadth and investment capacity to deliver significant benefits. Readers will have access to a wider and more diverse range of frontlist and backlist content in multiple print and digital formats. Authors will gain a greater depth and breadth of service, from traditional frontlist publishing to innovative self-publishing, on a global basis. Employees of the new organisation will be part of the world's first truly global consumer publishing company, committed to sustained editorial excellence and long-term investment in a rich diversity of content. And shareholders will benefit from participating in the consolidation of the consumer publishing industry without having to deploy additional capital.
The combination is subject to customary regulatory and other approvals, including merger control clearances, and is expected to complete in the second half of 2013.
In 2011, Random House reported revenues of €1.7bn (£1.48bn) and operating profit of €185m (£161m). Penguin reported revenues of £1.0bn and operating profit of £111m with total assets of £1.0bn. After completion, Pearson will report its 47% share of profit after tax from the joint venture as an associate in its consolidated income statement.
Under the terms of the agreement, neither Pearson nor Bertelsmann may sell any part of their shareholding in Penguin Random House for three years. To protect Pearson's interests as a minority shareholder, if Bertelsmann declines a Pearson offer to sell its entire shareholding, Pearson may require a recapitalisation by which Penguin Random House raises debt of up to 3.5x EBITDA, with a dividend distributed to shareholders in line with their ownership. In addition, from five years after completion, either partner may require an IPO of Penguin Random House.
Marjorie Scardino, chief executive of Pearson, said: "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."
Thomas Rabe, chairman and CEO of Bertelsmann, said: "With this planned combination, Bertelsmann and Pearson create the best course for new growth for our world-renowned trade-book publishers, to enable 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."
John Makinson, Chairman and CEO of Penguin, said: "All of us who work in book publishing experience every day the breathtaking pace of change in our industry. The partnership that we are announcing today will position Penguin Random House at the forefront of that change. Our access to investment resources will allow us to take risks with new authors, to defend our creative and editorial independence, to publish the broadest range of books on the planet, and to do it all with the attention to quality that has always characterised both our great companies."
Markus Dohle, Chairman & CEO of Random House, added: "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."
http://www.us.penguingroup.com/static/pages/aboutus/pressrelease/penguin_random_house_102912.html
A last gasp from a dying industry? Analysing the Penguin-Random House deal
Two of the world’s biggest English-language book publishers, Penguin and Random House, are forming a joint venture. Bertelsmann, the owner of Random House, will have 53% of the venture with Penguin’s owner, Pearson, having 47%. It is not a merger – each company retains certain ‘exclusive’ rights and, as is common with joint ventures, there are a variety of rules to protect each party.
So why are these two publishing giants forming Penguin Random House (PRH)?
The reasoning is simple. The book industry is going through a period of change driven by the internet and electronic delivery. Like the music and newspaper industries before it, traditional business models in book publishing are failing, and established publishers are desperately seeking a sustainable way forward.
This rationale is clear from the press release. Together, the two publishers “will have a stronger platform and greater resources to invest in rich content, new digital publishing models and high-growth emerging markets”. But does it make sense, or is this simply a last gasp from dying businesses?
Unlike recorded music and newspapers, book publishers have been reasonably successful in the internet age. The internet has created new ways to ‘sell books’. The original internet retailing model, pioneered by Amazon, involved the physical delivery of books around the world. It undermined the ability of publishers to set different prices in different countries, but at least people still bought books.
The second internet model, the delivery of e-books, has had a bigger impact on physical book sales. However, selling e-books rather than physical books has probably been positive to publishers’ profits. The marginal cost of producing and distributing an e-book is close to zero, so both prices and costs have fallen. Ease of access has broadened the book market. So why aren’t the publishers smiling all the way to the bank?
There are two problems with this rosy picture. First, book publishers have not driven these changes. The publishers have been followers – of Amazon and Barnes & Noble for internet retailing and of Amazon and Apple for e-books. So while new internet models have needed the publishers to access the authors and the back catalogue, the publishers have been the passive beneficiaries of innovation by others. This is unlikely to continue in the future. Someone will want to cut the publishers out of the picture and take their profits away.
Which brings us to the second problem: e-publishing. Apple has dipped its toes into the water with iBooks Author, but others will aggressively follow. And if authors can work directly with the suppliers of e-book hardware, like the Kindle (Amazon) and iPad (Apple), then the publishers are redundant. This is why the publishers are scrambling for new business models, like the PRH joint venture. They are trying to work out a business model in a world where authors, readers, and hardware providers do not need them.
How should the competition watchdogs, like our Australian Competition and Consumer Commission (ACCC), respond to these market developments? In the US, competition authorities prosecuted Apple and six publishers for collusion. The case is ongoing, but relates to contractual conditions that limited the ability of publishers to discount e-books.
Matthew Yglesias dismissed this case in Slate, saying: “Worrying about anti-trust issues in the book publishing industry is like worrying about a horse and buggy cartel”.
But Yglesias misses the point. Book publishing is in a period of evolution, and market participants have strong incentives to design the market in a way that limits competition and raises profits. The US authorities correctly kept an eye out for such conduct and pounced when it arose.
What about the PRH deal? It requires clearance by competition authorities around the world. Should they be concerned?
The (unhelpful) answer is yes and no. It all depends on how fast the industry evolves. If evolution is slow, and book publishers remain the gate-keepers for authors for, say, the next five years, then a joint venture between two of the industry giants raises significant concerns. It could lead to higher prices and allow PRH and other large publishers to “massage” the industry in a way that protects their own profits.
In contrast, if evolution is fast, then within five years, book publishers could be reduced to niche players only dealing with back catalogue until copyright expires.
So competition regulators will have to hope their crystal balls are working when considering the PRH joint venture. But whether the deal is cleared or not, it is certain that we will see a lot more change in book publishing over the next few years.
What the Random House-Penguin Merger Means for Authors (Analysis)
The deal that creates the world's largest publisher could directly impact their book advances.
This story first appeared in the Nov. 9 issue of The Hollywood Reporter magazine.
The Oct. 29 merger of book behemoths Random House and Penguin not only creates the world’s largest publisher, home to authors as diverse as Fifty Shades of Grey’s E L James and mystery writer Patricia Cornwell, it also will present a formidable challenge to the growing power of such digital distributors as Amazon and Apple. And some already are worrying that the consolidation will decrease opportunities for authors and drive down advances.
The company, to be called Penguin Random House, will boast $4 billion in revenue and control about 25 percent of the worldwide consumer book market. In the U.S., its share of book sales will hover around 40 percent. Bertelsmann, the German conglomerate that owns Random House, will control 53 percent of the new company. (Penguin’s British-based parent Pearson Llc. will hold the rest.) Bertelsmann chairmanThomas Rabe says the merger -- subject to regulatory scrutiny in the U.S. and abroad -- will produce a “diversity of publishing opportunities for authors, agents, booksellers and readers.” Pearson CEOMarjorie Scardino promises the company will be “more adventurous” in moving into digital publishing.
But some, such as IAC’s Barry Diller and partner Scott Rudin, who recently announced a new digital book company, have argued that the future of publishing is with pure digital players unburdened by legacy costs (like printing). Penguin Random House is doubling down in the opposite direction, believing that combining its legacy investments in marketing and distribution actually will make it a stronger digital force by shedding some costs in production and warehousing while giving it more money for marketing. This strategy is designed to combat not only Amazon, which controls about 60 percent of the e-book market and perhaps 40 percent of total sales, but also Apple, which is looking to increase its 10 percent share of the e-book market with the just-introduced iPad mini.
STORY: Penguin and Random House to Merge to Create Book-Publishing Giant
Agent Robert Gotlieb, chairman of Trident Media Group, which represents such authors as Deepak Chopra and Stephen Colbert, calls the promise of savings “Wharton Business School-speak for cutting.” He predicts a merging of imprints and publishing divisions to the financial and artistic detriment of authors. “It gives one company enormous power to dictate terms to authors,” he says.
Still, the combination is likely to be just the first shoe that drops in publishing. When news of the Penguin-Random House talks leaked, News Corp. owner HarperCollins made a late offer for Penguin for a reported $1.6 billion. Now analysts are wondering which of the remaining “Big Six” (Macmillan, Hachette or Simon & Schuster) Rupert Murdoch will court next. Many believe News Corp. will gobble up a big-name publisher in advance of the company’s split of its newspaper-publishing operations from its entertainment units.