Once the Penguin Random House deal closes, the new company, which they say "will continue to publish their books with the autonomy they presently enjoy, and retain their distinct editorial identities," will comprise all the English, Spanish and Portuguese language interests of Penguin and of Random House, as well as Penguin's operations in China and other interests. That includes Penguin's recently-acquired Author Solutions (whose roughly $100 million in sales has not been included as everyone has compared the relative sizes of the companies) and other Penguin assets such as Bookworld, the Australian ebookstore comprising the Borders and Angus & Robertson online businesses.
As the minority partner, Pearson can "offer to sell its entire shareholding" to Bertelsmann after three years and if their partner declines, then Pearson can "require a recapitalization" by raising debt equal to up to 3.5 times EBITDA, with "a dividend distributed to shareholders in line with their ownership." Five years after the deal closes, "either partner may require an IPO of Penguin Random House."
While some news organizations have noted the deal does not include a breakup fee if it is not consummated, it cannot be derailed by anything other than regulatory issues. Makinson tells us both companies "have signed a binding undertaking" and "the only condition to closing is regulatory approval," so Pearson's board could not abandon the deal in favor of a cash offer from some other party. If HarperCollins is looking to acquire more scale and has money to invest, they-- like their other peers -- will have to look to other potential acquisitions. (Presumably Les Moonves' phone has been ringing.)
As we hinted in calling it a "cashless sale" last week, the deal structure should please Pearson shareholders. Once it closes, Penguin's results will be treated as discontinued operations and Pearson will report only their share of Penguin Random House's profits. "It will have quite a positive effect on both the margin and balance sheet of Pearson," Makinson said, since Penguin is lower margin business than education for Pearson and trade publishing "employs a lot of working capital." Makinson underscored, "there's no write-off of goodwill" at Pearson when the asset transfer is made. While Pearson has been supportive of Penguin with capital investment for purchases like ASI, Makinson noted "one of the issues I thought about a lot in this combination...is the competition for capital." He expects that "within the Bertelsmann balance sheet we probably have a better shot at getting access to investment capital" in the future.
In a letter to Random House staff explaining "this is the future," Dohle stressed "the coming together of Random House and Penguin is both a realization of [Bertelsmann's] strategic plan for growing creative content businesses, and further affirmation of their belief in the great future of trade book publishing."
Echoing Makinson's words in a letter to Penguin staff last week when the talks were first acknowledged, Dohle wrote to employees, "I understand how difficult it is not having all of the details immediately about our new company. In order to overcome the uncertainty for all of you I will communicate and share with you directly and regularly as we move toward this transition, and I will do so with complete openness and transparency."
The key to the new joint company is, Dohle said, that "authors remain the center of everything we do" and that they, and their agents, "will continue to enjoy an enormous choice of publishing homes, where creative autonomy and great resources will be a defining hallmark."
Dohle said he is "deeply convinced that the creativity and experience of our publishers, aligned with our decentralized entrepreneurship, will enable us – together with our new colleagues – to more completely and immediately realize our vision to provide our content for everyone, everywhere, in every format, and on every platform." The combined Penguin Random House "will be able to offer a deeper, even more robust backlist, along with our highly successful frontlist" on a global scale. In addition, "both companies are already highly advanced and accomplished in digital publishing, and with this new partnership we will accelerate our digital transformation, while ensuring a strong future for print." Dohle also wrote separate letters to agents, authors, and booksellers, which we link to at the end of this piece.
In a separate letter to Penguin staff, Makinson said that discussions of industry consolidation had been taking place among Penguin management "for several years now" and as such, "we could have waited" to make a deal. But, Makinson explained, "in any industry it's always right to lead the process of consolidation rather than to follow. That way you get to pick the most attractive partner and steal a march on everyone else. I have always thought that Random House would be far and away the best partner for Penguin, not just because of its reach and our obvious complementarity, but because of the outstanding quality of its publishing."
The scale of the consolidation will lead to regulatory scrutiny in many places. Makinson told us "we know that there is quite a regulatory compliance burden" and "we are realistic about that," though he said "we aren't expecting there to be anything material" required for approval since "the combined market share of the two companies falls short of 30 percent" in major territories. He added, "we wouldn't have reached this point of announcing the transaction unless we felt some confidence in our ability to obtain regulatory clearance."
Trickier, perhaps, is that Penguin is currently in litigation with the US Department of Justice over ebook pricing and is the one trade publisher in Europe that declined to settle with the European Commission over similar issues. Makinson acknowledged that "our relationship with Justice becomes more complicated as a result of having two parallel inquiries" (the regulatory clearance and the ebook litigation). While saying their position on DOJ suit has not changed and they are "not about to settle it," Makinson admits that "we'll be giving it some more thought" and "will sit down with our partner at Random House and try to figure out the best way through this." (Though minor, the deal also enmeshes Random House in the Bookish joint venture.)
Penguin's release notes the expectation that the combined company "will generate synergies from shared resources such as warehousing, distribution, printing and central functions" and financial analysts have started trying to estimate the costs savings, though Makinson emphasized to us that "the deal isn't really driven by the costs arithmetic." He said that they will now "embark on a more careful and granular process to think about how we achieve the benefits of combination." Joint teams from Penguin and Random House will work through some of those details "and Markus and I will exercise joint stewardship of that process." Makinson said that in many ways it's an extension of "a conversation we've been having for some time" since "many of those decisions are going to have to be taken in any case because of the changes from physical to digital content."
In further remarks, Bertelsmann ceo Thomas Rabe said in the announcement: "With this planned combination, Bertelsmann and Pearson create the best course for the future of our world-renowned trade-book publishers, Random House and Penguin, by enabling 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." He further added: "The combination of Random House and Penguin, first of all, significantly strengthens book publishing, one of our core businesses. Second, it advances the digital transformation on an even greater scale, and third, it increases our presence in the target growth markets Brazil, India and China."
Pearson ceo Marjorie Scardino, who is leaving the company at the end of the year, stated: "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."
Dohle, who will run the day-to-day operations of Penguin Random House, said as part of the joint statement: "Our new company will bring together the publishing expertise, experience, and skill sets of two of the world's most successful, enduring trade book publishers. In doing so, we will create a publishing home that gives employees, authors, agents, and booksellers access to unprecedented resources. I deeply believe that the support and services that we will be able to offer, coupled with the creative and editorial independence that we will continue to maintain, will benefit everyone in the book publishing environment, especially our passionate readers from today's generation to the next."
Dohle Letter to Agents
Dohle Letter to Authors
Dohle Letter to Booksellers
Dohle letter to staff
Makinson letter to staff