Bertelsmann 'seeking equity partner to buy PRH'

Bertelsmann 'seeking equity partner to buy PRH'

Bertelsmann is seeking a private equity partner to help it buy out Pearson's stake in Penguin Random House, three sources have told Reuters.

One source "close to Bertelsmann’s management thinking" told the news agency that "it is definitely something Bertelsmann has looked into."  The source added: "The main issue is whether Pearson wants to sell its stake in one deal or whether it wants to sell in phases,” because selling in one go would be "a challenge". 

Pearson currently owns a 47% stake in PRH while Bertelsmann controls the remaining 53% of the company. Pearson's stake is estimated to be worth around $2bn (£1.33bn) in value.

Selling its 47% stake is "the next logical move” for Pearson, an analyst told Reuters, because the company has already pledged a “100%” focus on education as part of its new strategy.

Penguin and Random House merged in October 2012, with the deal completing in July 2013. The deadline which stipulated Pearson and Bertelsmann had to hold onto their shares for at least three years after the deal was finalised ran out last month, but Pearson c.e.o John Fallon has since said the company will keep its stake until at least 2017.

Two sources told Reuters that talks between the two owners of PRH are "expected to resume" next year.

However, Jonathan Helliwell, an analyst at Panmure Gordon & Co, told The Bookseller he did not see a 2016 deal as likely because it would make more sense for Pearson to wait and get the best selling price for the PRH merger in 2017 or later.

He said: "My take is that this is Bertelsmann putting itself in a position to move quickly if Pearson chooses to sell in 2016 - but it doesn't mean an early deal is any more likely. I would still put my money on a disposal in 2017 or later.

"Pearson is in a state of flux at the moment, with the core education business under pressure, assets being sold (FT, Economist) in order to control debt, support the dividend and provide funds for education acquisitions, plus pressure from investors to retrench and changes at board level which may bring a fresh perspective (Pearson recently hired a new finance director Coram Williams and a new chairman Sidney Taurel). So Bertelsmann are wise to prepare for the possibility of an early sale."

Helliwell added: "It also makes sense that Pearson might need to bring in external funding, given a hefty likely price tag and its existing spending commitments in other areas such as education. However, an early sale would be problematic for Pearson, in that it would actually end up with too much cash on the balance sheet, and significant further pressure on  EPS forecasts (from the loss of PRH profits). It still makes more sense for Pearson to wait until it has maximised the synergies from the PRH merger (to get the best selling price) and wait until it has found other education assets to buy, before selling the final piece of family silver."

Fallon also reiterated at a conference in Barcelona earlier this month (12th November) that selling its stake in PRH was "more likely to be a 2017 than a 2016 issue", because the company was waiting to see the impact of restructuring and renegotiation of e-book terms had on the company's stock.

He said: "...We've seen across the industry negotiation of e-book terms and what implication that will have of e-book sales over the next six-12 months - so I think from our point of view, it makes sense to allow both of those issues to become clear before we look at any discussion with PRH because clearly we'd be giving away value if we didn't let those issues play through first."

Reuters suggested in its report that private equity firm Kohlberg Kravis Roberts (KKR) would be “a logical candidate to help [Bertelsmann] shoulder a Penguin Random House deal”. This option was highlighted because Bertelsmann's chief executive Thomas Rabe used KKR's financial help to restructure its music business, BMG, in 2009. 

Helliwell at Panure commented KKR is "just one of several private equity groups", adding "I don't see any particular angle in their interest as opposed to other private equity houses."

Neither Bertelsmann or KKR have chosen to comment. Pearson said it had nothing to add, and that its position is unchanged since Fallon's statement regarding the PRH issue at the Barcelona conference.