News

29 October 2012 | Education | Pearson plc

Pearson and Bertelsmann Agree JV

Pearson has reached an agreement with Bertelsmann to merge Penguin and Random House. The combination brings together two of the world's leading English language publishers.

Random House is the leading English language publisher in the US and the UK, while Penguin is one of the world's most famous publishing brand and has a strong presence in fast-growing developing markets. Both companies 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%. Pearson will retain rights to use the Penguin brand in education markets worldwide.

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.

The JV is a response to the long term trends and  changes affecting the consumer publishing industry. It is believed Penguin and Random House can best be sustained and enhanced by combining to create a stronger platform able 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.

Authors will gain a greater depth and breadth of service, from traditional frontlist publishing to innovative self-publishing, on a global basis. Shareholders will benefit from participating in the consolidation of the consumer publishing industry without having to deploy additional capital or pay a buyers premium.

The combination is subject to 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 EUR1.7bn (£1.48bn) and operating profit of EUR185m (£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."

Comment:

At face value Pearson appear to have struck a good deal gaining a 47% stake in the JV. Penguin previously contributed around 40% of the aggregate operating profits of the two businesses to be combined. This deal may be a further step towards Pearson eventually becoming a pure education play. 

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