A long story

Last Updated: Mon, Oct 29, 2012 19:53 hrs

Pearson’s future adventures in book publishing will be more saga than short story. Combining Penguin books with Bertelsmann’s Random House unites two of the world’s biggest publishers in a $3 billion-plus joint venture, just as the industry grapples with a shift to digital. The education-dominated Pearson reckons it can create more value by staying in general publishing than by pulling out entirely. The tale seems plausible - even if Harper Collins owner Rupert Murdoch was reportedly circling with a 1-billion-pound ($1.6 billion) cash counterbid.

The JV’s 53-47 ownership split in Bertelsmann’s favour looks fair. The financials aren’t clear, since the only numbers for Bertelsmman include its domestic German publisher, which is excluded from this English-language deal. But a bit of reverse engineering is possible. Strip out the 15.6 percent of revenue that Random House made at home last year, and the remaining unit would have contributed 52 percent of sales to a group merged with Penguin. If the same split holds for profit, Random House would have contributed 53 percent of operating profit.

Pearson has also sensibly built in minority-investor protections. Either party can trigger a stock-market float after five years. And if Pearson wants to sell and Bertelsmann won’t buy, the former can force the mellifluously rechristened “Penguin Random House” to borrow more to pay a big dividend.

Both parents will share in synergies, too. Exasperatingly, Pearson makes no attempt to quantify them. But savings in warehousing, printing, distribution and so on should be significant: more than 200 million pounds annually, on UBS estimates.

The last-minute alternative, according to reports in his own papers, was a Murdoch-funded exit. A deal would certainly have bolstered the news and publishing arm of his News Corp empire ahead of its planned spin-off. Pearson would have got a clean break and cash. Some investors and analysts, who often have an aversion to long, complicated stories with loose ends, might have preferred this alternative ending.

But the real value to Pearson could have been a lot less. Even if a Murdoch deal materialised, roughly two-thirds of Penguin is U.S.-based, so a stonking tax bill for capital gains might have followed. Plus if those talks collapsed, Pearson might then have found itself without a partner despite having started this round of publishing consolidation. And Pearson would get no upside if a merged company finds a way to thrive in the e-book age. It might be worth sticking around for publishing’s next chapter.

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