* Bertelsmann to own 53 percent of joint venture
* Deal comes despite Murdoch interest in Penguin
* Pearson shares flat
By Kate Holton
LONDON, Oct 29 Britain's Pearson and
Germany's Bertelsmann plan to merge their publishers Penguin and
Random House, aiming to gain the upper hand in their
relationship with Amazon and Apple, the leaders in the ebook
Education and media publisher Pearson said on Monday the
joint venture - which will bring under one roof fantasy novelist
Terry Pratchett, "Fifty Shades of Grey" author EL James and 2012
Nobel prize winner Mo Yan - would be named Penguin Random House.
Confirmation of a deal came after months of Pearson board
discussions and despite an informal approach from Rupert
Murdoch's News Corp, which was interested in combining
Penguin with its own Harper Collins publishing unit, a person
familiar with the situation said.
News Corp declined to comment.
"The consumer publishing industry is going through a period
of tumultuous change, propelled by digital technologies and the
giant companies that dominate them," Pearson Chief Executive
Marjorie Scardino said in an email to staff.
"The book publishing industry today is remarkable for being
composed of a few large, and a lot of relatively small
companies, and there probably isn't room for them all - they're
going to have to get together."
Under the plan, Bertelsmann will own 53 percent of the
venture and nominate five directors to the board, while Pearson
would own the rest and nominate four. Both must retain their
stakes in the venture for at least three years.
Penguin chairman and CEO John Makinson will be chairman of
the new venture, and Random House CEO Markus Dohle will be its
"We will have more than 250 imprints in this company," Dohle
said in an interview with Reuters. "We want to preserve and give
those imprints even better and richer resources."
The closing of the transaction is scheduled to take place in
the second half of 2013, following regulatory approval.
Analysts said they would have preferred a bid from a group
such as News Corp, which would have brought cash into the
company and enabled Pearson to quit a market that has been hit
by the rapid growth of the ebook and the control it has given to
major distributors such as Amazon, Apple and
Pearson, however, said the merger would provide significant
synergies and the opportunity to spend more on the new
technologies transforming the industry.
"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," Scardino said.
The two groups said they would save money on joint
warehousing, distribution, printing and central functions. They
gave no details but UBS estimated possible savings of 10 percent
of their combined cost base.
A joint venture will also allow Pearson to retain a link
between its education division and the world-renowned Penguin
brand. It also avoids a large tax bill in the United States
which would have been incurred had Penguin Books been sold.
"We can see why Pearson has chosen this option, but there
may be some disappointment there is no outright sale, and
especially with the lock-in of the stake," Liberum Capital
research group said.
In the first nine months of 2012, Random House was the
biggest book publisher in the two major English language markets
of the United States and Britain. It was buoyed by the huge
success of the "Fifty Shades" trilogy of novels, which sold more
than 30 million copies between March and June, evenly divided
between the trade paperback and ebook editions. Penguin was
second in the U.S. and third in Britain, behind Hachette.
Mike Shatzkin, founder and CEO of book research consulting
firm Ideal Logical, said a tie-up would make the joint venture
by far the biggest player in the market.
"This is about negotiating power," Shatzkin said. "Random
House and Penguin will have so many of the most important books,
it's hard to see how any retailers can live without them."
Under the agreement, Pearson said it could sell its stake to
Bertelsmann after three years, but if Bertelsmann declined to
buy, the joint venture could raise debt to pay both sides a
dividend. Either side could require a stock market flotation
after five years.
Pearson will include its 47 percent share of the joint
venture's profit after tax as an associate in its consolidated
statement. While the 47/53 ratio is favourable to Pearson, given
the size of the two publishers, the joint venture excludes
Bertelsmann's German trade publishing business.
Shares in Pearson were flat at 1,222 pence at 1550 GMT, in
line with the broader London market.
On Oct. 3 Scardino said she would step down at the end of
2012 after 16 years, prompting analysts to wonder if the group
would sell off its last remaining media assets and focus on its
dominant education arm.
Many, however, had focussed on whether Pearson would sell
the FT Group, which publishes the Financial Times newspaper.
"Basically what people are really hoping for is (clarity)
with the FT because that's the family silver and that would show
they really have changed. I think they're seeing how it goes.
One thing at a time," a top 50 Pearson shareholder said.
Bertelsmann, Europe's biggest media group and owner of
European TV broadcaster RTL Group, is also in the
middle of an overhaul to catch up with rapidly changing markets.
Random House is strong in Britain and the United States,
while Penguin - founded in 1935 by publisher Allen Lane, who
decided the mass market needed cheap paperbacks after finding
nothing to read at a railway station - is the world's most
famous publishing brand, with a strong presence in fast-growing
Both groups have had to invest in the launch of ebooks. They
made up 22 percent of Random House's global business in the
first half of 2012, compared with around 20 percent for Penguin.
Analysts say regulators will want to look at the tie-up to
ensure it complies with antitrust laws.
"I don't think they're going to be anxious to approve it.
They'll have to think about it and think about where the
industry is going and whether this is a necessary response,"
said Bert Foer, head of the American Antitrust Institute think
tank, formerly of the Federal Trade Commission's Bureau of
Competition, and father of three published authors.
In 2011, Random House had revenues of 1.5 billion pounds
($2.4 billion) and operating profit of 161 million. Penguin
reported revenues of 1 billion pounds and operating profit of
Pearson also published a trading update, showing sales up 5
percent in the first nine months but operating profit down 5
percent, reflecting the sale of assets, acquisition costs and
weakness in the British professional training market.