Just days after word broke that a Penguin/Random House merger was a possibility, it’s nearly a done deal. The companies announced they’re creating a joint venture, pending regulatory approval. (To the disappointment of the Twitterverse, it will be named Penguin Random House, not Random Penguin.)
Bertelsmann will own 53 percent, and Pearson, 47 percent of the new company. Markus Dohle, CEO of Random House, will be CEO; John Makinson, chairman and CEO of Penguin, will be chairman. Bertelsmann will nominate five directors to the board and Pearson, four.
Penguin Random House will include all the publishing divisions and imprints of Random House and Penguin in the United States, Canada, the United Kingdom, Australia, New Zealand, India, and South Africa, as well as Penguin’s publishing company in China, and Random House’s Spanish-language publishing operations in Spain and Latin America. The joint venture excludes Bertelsmann’s trade publishing business in Germany, and Pearson keeps the rights to use the Penguin brand in education markets.
Neither company can sell their interest for three years. From five years after the deal completes (expected to be the second half of 2013), either party can demand an IPO. And if Bertelsmann declines a Pearson offer to sell its entire holding, Pearson may require a recapitalization and dividend distribution.
“The combination is subject to customary regulatory and other approvals, including merger control clearances,” Pearson said in a statement. Getting those approvals may not be a slam dunk: According to Shelf Awareness, Penguin Random House “is estimated to represent about 25 percent of trade publishing in the U.S. and U.K. and may have some antitrust difficulties.” However, SA added, “Manager Magazin in Germany said that the companies were already having detailed discussions with regulatory bodies in the U.S. and European Union.” And Makinson told the Guardian, “I don’t think our combined market share will trigger the need for disposals” because it is under 30 percent.
Pearson and Bertelsmann say the joint venture’s “organic investment in authors and new product models will exceed the total investment” of the companies separately. And in a letter to literary agents published by Digital Book World, Random House says its imprints will still have “tremendous autonomy and financial resources to decide which books to publish, and how to publish them.”
The deal forestalls a rival offer from NewsCorp to buy Penguin outright for about $1.6 billion, according to the U.K.’s Sunday Times, which is also owned by NewsCorp. The deal would have instead combined Penguin with HarperCollins.
There’s no chance of Penguin changing its mind and taking the money, however. There is no breakup fee included in the Penguin-Random House agreement, according to Business Insider, which quoted Christian Steinhof, a Bertelsmann spokesman, as saying, “After five months of detailed discussions both sides are firmly committed to this transaction and saw no need for one.”
Makinson sounded the same note in The Guardian, saying, “There isn’t any sort of break clause [with Bertelsmann],” he said. “It is a signed transaction.” As the Guardian noted, the plan doesn’t require approval by Pearson shareholders, so NewsCorp can’t outbid Bertelsmann that way.
Though a small footnote to most, given the scale of the transaction, the merger creates uncertainty for libraries about which model the venture will follow when it comes to library ebooks, which is one of the areas in which what Marjorie Scardino, outgoing CEO of Pearson, called “an almost perfect match” of corporate cultures falls down. Random House, of course, currently sells what it calls ownership of ebooks to libraries, albeit at increased prices, while Penguin is only tentatively testing a return to the library market with a 3M pilot after breaking with OverDrive earlier this year.
For financials, quotes, and ongoing updates on this evolving story, see infodocket.com.