The march of the Random Penguin
There’s a new corporate marriage on the horizon, and the pre-nup has been signed on the dotted line. In late October 2012, Penguin and Random House, two of the world’s largest English language book publishers, announced plans to combine their businesses into a new joint venture – Penguin Random House (see report here). Bertelsmann, the owner of Random House, will own 53% of the joint venture and Penguin’s owner, Pearson, will own 47%.
According to the terms of the pre-nup, neither party can sell any part of its shareholding in Penguin Random House for three years. After that, if Bertelsmann declines an offer by Pearson to sell its entire shareholding, Pearson can require a recapitalisation. This would involve Penguin Random House raising a debt, with a dividend distributed to shareholders according to their ownership. After five years, either party can require an initial public offering (IPO) of Penguin Random House.
Yet the marriage will require the blessing of competition authorities around the world before it can be consummated in what the parties hope will be the second half of 2013. The big six in the global market – HarperCollins, Macmillan, Hachette, Simon & Schuster, Penguin and Random House – will now be the big five. Based on recent financial reports, combining the two houses will create annual revenues of about A$3.8 billion and a quarter share of both the UK and US markets. In Australia, the marketplace is looking similar, with all the same global names, but some independent players in the mix too, such as Scribe, Text Publishing and Allen & Unwin.
Competition regulators will have to use all their powers of foresight in assessing the likely effects of the proposed merger in such a rapidly evolving marketplace. Although both Random House and Penguin have invested in e-book and online retailing, the advent of e-publishing may further shrink the market. Apple has already debuted its “i-author” program, which cuts out the middle-man from the traditional author-publisher-reader chain. Plus there is the significant influence presented by online retailers such as global giant Amazon, who are also expanding from simply selling into publishing too.
But a step back in time shows that the pace of change in an industry can take even the regulator by surprise. In assessing the Angus & Robertson and Borders merger in 2008, the ACCC then declared that the internet was unlikely to provide a “strong competitive constraint on bricks and mortar retailers” and did not factor this into its final decision not to oppose the merger. Several years later the merged company is extinct. Suspected cause of death: online book retailing. The ACCC commenced its review of the Penguin Random House proposal on 11 January 2013 and expects to announce its findings in early March.
With talk of further consolidations within book publishing, distribution and retail as digitisation excels and consumers change their buying patterns, competition regulators can’t afford to be bookish.