Pearson has agreed to sell 22% of its stake in Penguin Random House (PRH) to co-shareholder Bertelsmann, valuing the publisher at $3.55bn (£2.76bn) including debt.
The move means Bertelsmann will tighten its grip on the publisher, owning a 75% stake, while Pearson will own the remaining 25%. The deal is expected to close at the end of September 2017.
The increase in Bertelsmann's stake has "no effect" on PRH, the company said, adding that "the independence of the group’s 250-plus individual publishers remains unaffected". Markus Dohle will remain c.e.o.
Education giant Pearson has a 47% stake in PRH but in January issued an "exit notice" to Bertelsmann, which at the time said it would seek to increase its stake in the company from 53% to between 70-75%. It will now be subject to an 18-month lock-in period from closing of the deal, during which Pearson cannot sell any more of its stake.
The agreement will generate proceeds of $1bn to feed back into the Pearson business and strengthen its balance sheet, invest in its digital transformation - and return £300m in surplus capital to shareholders in a share buyback.
The cash injection will help the Pearson business after it reported a massive pre-tax loss for the year of £2.6bn in February, following the challenges it has been facing in the US education market. Sales at the educational publisher fell by 8% to £4,552m in underlying terms for the 2016 year, and adjusted operating profits of £635m were down 21%. Shares in Pearson jumped 3% following news of the sale this morning (11th July).
John Fallon, chief executive of Pearson, said the merging of Penguin with Random House had proved to be "a great publishing success", as well as enabling some big cost savings.
"This has benefited readers, authors, and shareholders," he said. "Today's deal enables Pearson to realise a significant amount of the value we've helped to create whilst continuing to be part of the world's biggest and best trade publisher. We will use the proceeds to maintain our strong balance sheet, invest in our business and return £300m to shareholders.”
Thomas Rabe, chairman and c.e.o. of Bertelsmann, said the book business was part of Bertelsmann's identity. “Penguin Random House is a success story. We completed the integration in a very short time, and today the group is the clear worldwide number one in book publishing," he said. "We are especially pleased about this because the book business has been part of Bertelsmann's identity for over 180 years. Beyond this, the transaction is an attractive proposition economically, as the earnings attributable to Bertelsmann shareholders will increase by more than 60 million euros.”
Bertelsmann will now have four seats on the board and the right to appoint the chairman, while Pearson’s representation on the board has dropped from three people to two.
Rabe has described the agreement as having a “historical dimension” for the company.
“One hundred and eighty two years after the publication of the first Bertelsmann book, we are about to become the 75-percent owner of the world’s largest and most international trade book publishing group,” he said.
The increase in its share of PRH will mean “continuity and long-term orientation”, he added. “I know from many conversations with the management and employees of Penguin Random House that this is exactly what they want,” Rabe said. “Bertelsmann and Pearson are experienced media companies and well-practiced partners. The group’s 250 imprints will continue to be able to pursue their publishing activities independently in the future. This is the defining and crucial factor behind all their bestsellers – the ones to date and those in the future.”
When asked during a conference call about the sale, Fallon said he was "not aware" of any unease amongst publishers and authors about it. He added the company would be involved in PRH “for some years to come”.
"I wasn't aware of the unease," he said. "I do think the PRH joint venture has proved to be good for the industry. I think that having a strong, well run, commercially successful trade publisher that has done well in commercial and literary fiction, and non-fiction, and has proved itself able to expand internationally, is good for the industry. We're proud of the role we played in creating that. We're proud we will continue to be a part of that for some years to come. But frankly, even if we had sold all of our stake, I have great confidence in Markus Dohle and all the management team, and many of my former colleagues at Pearson, and Tom Weldon here in the UK. They are a cracking management team and have done a great job in the running the business and I have great confidence they will continue to do that."
Dohle, c.e.o. of PRH, said that Bertelsmann's acquisition of 75% of PRH "further strengthens Bertelsmann's cultural influence on our company".
He added that the deal signals "great continuity and stability" for Penguin Random House – "which makes it the best solution for authors, partners, publishers and employees. We can and will continue to focus on our authors’ creative works, and with that, on publishing the finest books and stories for our readers,” he said.
In an emailed message to staff this morning, Dohle said: "I would like to extend my sincere appreciation to each of you for your creativity, decication, and collaboration. You are at the centre of our success story, and you are the reason that our larger purpose comes to life each day through the books we publish."