UPDATE 1-Pearson confirms Random Penguin merger

Mon Oct 29, 2012 5:18am EDT

LONDON Oct 29 (Reuters) - Britain's Pearson has agreed to merge its Penguin book division with Bertelsmann's Random House to create the world's leading consumer publisher, in an apparent snub to Rupert Murdoch's News Corp.

Confirmation comes a day after Murdoch's Sunday Times reported that News Corp could make a direct bid for Penguin Books, an option that analysts appeared to prefer.

Jefferies released a note earlier on Monday saying they would favour the idea of a News Corp bid because it would bring cash into the company and enable Pearson to exit a challenged market.

Instead, the education and media publisher Pearson said the newly-created joint venture would be named Penguin Random House, with Bertelsmann owning 53 percent and Pearson the rest. Bertelsmann will nominate five directors to the Board of Penguin Random House and Pearson will nominate four.

Neither Pearson nor Bertelsmann may sell any part of their shareholding in the joint venture for three years. Analysts have noted regulatory hurdles could be an issue for the tie-up but with a joint market share expected to be around 25 percent in the United States and Britain the deal could go through.

The groups said the planned joint venture would help both sides adapt to the rapidly changing book market, which has been transformed by rapid growth in ebooks, and increased price competition from supermarkets.

"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," Pearson Chief Executive Marjorie Scardino said.

Pearson has increasingly focussed on its education business in recent years and analysts believe the group could also sell off its FT Group in time.

Bertelsmann, Europe's biggest media group and owner of European TV broadcaster RTL Group, is in the middle of an overhaul in an attempt to catch up with rapid changing markets.

Pearson also published a trading update, showing sales up 5 percent in the first nine months while operating profit was down by 5 percent, reflecting the sale of assets, acquisition costs and weakness in the British professional training market.

It reiterated its outlook of growth in sales and profits at constant exchange rates for the full-year.