Pearson Cuts Stake In Penguin -- WSJ

Bertelsmann tightens grip on publishing joint venture, paying U.K. partner $780 million

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 12, 2017).

BERLIN -- Bertelsmann SE is raising its stake in publisher Penguin Random House to 75%, tightening the German media company's control over one of the top prizes in the book business in a multimillion-dollar bet on the future of print.

Bertelsmann said Tuesday it was buying a 22% stake in the business from Pearson PLC for about $780 million. The British education company will retain a 25% stake in the publisher.

Pearson said it would receive a total of $968 million from the sale and associated dividend payments.

The move comes after years of strategic reorganizing in the publishing world, with companies worried that the rising popularity of e-books and online sales would permanently cut into their margins. But lately executives have noticed overall book sales rising as consumers spend more time reading, partly thanks to heightened interest in politics.

Global book-publishing revenue is expected to increase 9.7% from 2015 to EUR122.95 billion ($140.10 billion) in 2020, according to statistics cited by Bertelsmann.

Electronic book sales last year made up just 20% of Penguin Random Houses's total sales, according to an analysis by book industry expert Rüdiger Wischenbart for the Frankfurt Book Fair.

Printed books "will still be around in 100 years," Penguin Random House Chief Executive Markus Dohle said in a document sent to Bertelsmann employees and seen by The Wall Street Journal.

Executives at Bertelsmann said that the deal wouldn't affect Penguin Random House's daily operations, but Bertelsmann's increased control will give it the right to name the chairman of the publisher's board.

"The decision-making powers have of course shifted in our favor," Bertelsmann CEO Thomas Rabe said in an internal document sent to employees.

Increased control of Penguin Random House makes sense financially and strategically, with the deal set to boost Bertelsmann's earnings by more than EUR60 million while enhancing the prospects of its books business in China, India and Brazil, Mr. Rabe said.

Under the terms of the existing New York-based Bertelsmann-Pearson joint venture, the German company had the right to appoint the CEO, a position currently filled by Mr. Dohle, a Bertelsmann loyalist who has been with the company for 23 years and ran Random House before the merger.

Previously Bertelsmann had 53% of Penguin Random House. The increased stake comes after Bertelsmann this past winter announced it was targeting EUR20 billion in annual revenue by around 2020, with 30% coming from the U.S.

Penguin Random House's enterprise value for the transaction had been set at $3.55 billion, according to Bertelsmann, which was advised by J.P. Morgan Chase & Co. In preparation for the deal in the last few weeks, Bertelsmann issued a EUR500 million bond, according to the company's spokesman.

Bertelsmann Chief Financial Officer Bernd Hirsch said the company had financed the acquisition at "exceedingly favorable terms."

As part of the deal, Pearson can't make further changes to its slimmed-down minority stake until March 2019. Pearson finance chief Coram Williams said the company won't keep its stake in the joint venture forever. After the 2019 date, "we are free to do what we like," Mr. Williams said.

The 2013 merger of Penguin and Random House joined 250 brands that publish more than 15,000 titles a year.

Penguin Random House's stable of writers include Dan Brown, John Grisham, Ken Follett, George R.R. Martin, John Green and Paula Hawkins. Earlier this year, the house turned heads by signing a two-book deal with Barack and Michelle Obama that Bertelsmann called the highest advance ever paid in the history of book publishing.

Bertelsmann competes with News Corp, which owns book publisher HarperCollins, as well as Dow Jones & Co., the publisher of The Wall Street Journal.

In January, Pearson issued an exit notice that its 47% stake could be up for sale. Pearson faced falling revenue from its North American higher-education business and told investors it was looking to shore up its balance sheet.

The stake sale has provided Pearson with around GBP300 million ($387 million) of extra capital that will be used for a share buyback, said Mr. Williams, Pearson's CFO.

The transaction is expected to close in September pending regulatory approval in the EU and other jurisdictions, the companies said.

Olga Cotaga and Nina Trentmann in London contributed to this article.

Write to Zeke Turner at Zeke.Turner@wsj.com

(END) Dow Jones Newswires

July 12, 2017 02:47 ET (06:47 GMT)