Penguin Books, Random House merger creates giant
- Merger creates consumer publishing giant with 25% market share
- Analysts say Amazon remains 'gorilla' of the book-selling business
- Deal ends speculation Rupert Murdoch's News Corp. would pay $1.6B for Penguin
Two of the largest book publishers -- Penguin, home to Patricia Cornwell and Nora Roberts, and Random House, which publishes E.L. James and George R.R. Martin -- are planning to merge into the world's largest publisher in a deal announced Monday.
If approved by government regulators, the merger would combine the two publishers' parent companies, the British-owned Pearson and the German-owned Bertelsmann.
The merger also heads off a bid by Rupert Murdoch's News Corp., which owns publisher HarperCollins, to buy Penguin for $1.6 billion.
For the media giants, challenged by the rise of e-books and Amazon's aggressive discount pricing, the merger would produce economies of scale as they combine operations, such as marketing and distribution.
The new joint venture would publish about 25% of all books in the U.S. But what the consolidation means for readers and authors isn't as clear.
Under the terms of the agreement, Penguin and Random House will combine their businesses in a joint venture named Penguin Random House. Bertelsmann will own 53%, Pearson 47%.
John Makinson, currently chairman and chief executive of Penguin, will be chairman of the new firm; Markus Dohle, currently chief executive of Random House, will be its chief executive.
In a letter to Penguin employees, Makinson says, "I have no doubt that some authors, agents and customers will express concern to many of us that this merger will reduce choice and competition. (Markus and I) believe that exactly the opposite will happen."
"The publishing imprints of the two companies will remain as they are today, competing for the very best authors and the very best books," Makinson's letter said. "But our access to investment resources will also allow Penguin Random House to take risks with new authors, to defend our creative and editorial independence, to publish the broadest range of books on the planet."
One issue that may complicate the planned merger is the Department of Justice's pending litigation against Penguin over e-book pricing. In Europe, Penguin has declined to settle with the European Commission over similar issues.
Makinson told Publishers Lunch, a digital newsletter, that Penguin plans to "sit down with our partner at Random House and try to figure out the best way through this."
Analysts' reactions were mixed. Jonathan Jackson, head of equities at Killik & Co. characterized the merger as "sensible," but "clearly a defensive response to the long-term pressures affecting the industry, including dramatic growth in digital retail channels, self-publishing and digital reading."
In a research note to its clients, Jefferies International said it would have preferred Pearson sell off Penguin altogether.
"The gorilla of the book business is no publisher, it's Amazon and it will stay that way," Jefferies' note said.
Bertelsmann and Pearson agree they will not pull out of the venture for three years. After five years, either partner could trigger a floating of the venture's shares in public trading.
Pearson shares finished up 0.3% in London trading. Trading in New York is closed due to Hurricane Sandy.
Under terms of the deal, Random House worldwide chief executive Markus Dohle will be CEO of the new group while Makinson will be the chairman of its board of directors.
In 2011, Random House reported revenues of $2.2 billion and operating profit of $238 million. Penguin posted revenues of $1.6 billion and an operating profit of $178 million.
Pearson said operating profit fell 5% the first nine months of this year though revenue increased by 5%. Revenue from Penguin was down 1% on a constant currency basis. And the company attributed a profit drop to its sale last year of its half share of FTSE International, a joint venture with the London Stock Exchange.
Contributing: The Associated Press