NEW YORK (Reuters Breakingviews) - Rupert Murdoch is writing his own ending in the book publishing M&A brouhaha. Rival Bertelsmann will pay $2.2 billion for the U.S. market’s third-biggest book purveyor Simon & Schuster, the companies said on Wednesday. The German media group already owns the massive Penguin Random House and the deal would make it the biggest by far. But U.S. regulators could thwart the transaction too, leaving News Corp’s architect an opening.
Book sales are hot, thanks in part to the Covid-19 pandemic. For the quarter ending Sept. 30, Simon & Schuster and HarperCollins reported double-digit gains in revenue. This is after years of an industry overhaul as a result of Amazon.com’s massive distribution network. Simon & Schuster’s top line has been falling over the past several years.
While companies that pump out books are enjoying a renaissance, it might not last forever. So now is a good time to consolidate - they can use their relatively stronger position to buy assets and seize the moment to cut costs. Still, Bertelsmann is paying top dollar. The deal is more than 15 times Simon & Schuster’s operating income before depreciation and amortization, the industry’s metric similar to EBITDA. That’s more than twice the implied valuation it paid for the stake it bought in Penguin Random House in 2017.
That deal was relatively complex, and so Bertelsmann’s experience may give it confidence to pay a higher price. Still, Murdoch can bide his time. Penguin Random House holds a commanding 25% of the total U.S. book market according to NPD BookScan, while HarperCollins maintains around 11%. Adding Simon & Schuster, the third-largest, to Penguin Random House would boost its slice of the literary nonfiction market, for instance, to over 70%.
Washington has already frowned upon a merger of one of the top telecoms AT&T when it tried to buy T-Mobile US, the No. 4 carrier at the time. The Department of Justice was set to block the textbook deal between McGraw-Hill Education and Cengage Learning before both parties folded. It also sued to prevent book printers Quad/Graphics and LSC Communications from combining last year.
President-elect Joe Biden’s administration will usher a new sheriff to town, but Democrats aren’t exactly kind to big business. So News Corp could wait until regulators bat down a deal, and come back with a bid - this time with one less rival.
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