Bertelsmann has agreed to buy Simon & Schuster for almost $2.2 billion (€1.85 billion), with the owner of Penguin Random House insisting it is "very confident" antitrust regulators will be comfortable with its towering position in the US books market.
The $2.18 billion price tag for ViacomCBS’s publishing arm is almost double some initial estimates and is about 15 times Simon & Schuster’s pretax operating profits last year, a high multiple in a sector with modest growth potential.
Bertelsmann significantly outbid Rupert Murdoch's News Corp and French media group Vivendi, but the German group still faces a significant challenge in winning competition approval for the deal.
"This is a high-quality asset, it is a scarce asset, and we knew that other publishers would look at it, and they did," Bertelsmann chief executive Thomas Rabe said. "We won the auction."
When combined with Penguin Random House, already the world's biggest publisher, the Bertelsmann publishing division will be home to some of the world's most popular and well-known authors, spanning everything from EL James and Stephen King to George Orwell and F Scott Fitzgerald.
‘Behemoth of books’
Mr Rabe rejected the market concerns raised by News Corp chief executive Robert Thomson, who last week warned the tie-up with Bertelsmann would create an anti-competitive "behemoth of books" controlling a third of the US market.
“We are very confident that this transaction will be cleared as presented,” Mr Rabe said. “I don’t want to be too bullish on this, but we are well prepared and confident, otherwise we would not have taken the decision. We honestly believe we are the best home and the best owner for Simon & Schuster.”
Asked whether Bertelsmann offered to pay a break fee if the transaction was blocked or pledged to make any necessary disposals to secure approval, Mr Rabe said: "I don't want to go into details, but be assured we gave Viacom the necessary assurance and comfort."
One person involved in the process said Bertelsmann agreed to pay a fee if it walked away from the transaction, and accepted a “hell or high water” clause that effectively locks in the deal unless it is blocked by regulators.
Solo bid
Bertelsmann expects to secure regulatory approval for the deal by the end of 2021, and plans to pay from its existing cash reserves. The group explored partnering with a private equity group but eventually decided to mount the bid alone.
Simon & Schuster had a string of political bestsellers in this election year, releasing hits including Donald Trump's niece Mary Trump's family memoir, Rage by Bob Woodward and Sean Hannity's Live Free or Die.
Penguin Random House, meanwhile, published Barack Obama’s A Promised Land, which is on course to smash records for a presidential memoir. Mr Rabe said the book had already sold 2 million copies.
The merged group would be several times bigger than its main rivals in the US books market, accounting for about one in three books sold in the country, according to NPD BookScan. Penguin Random House, through imprints including Alfred A Knopf and Vintage Books, publishes about 15,000 titles a year.
Simon & Schuster generated revenue of $814 million last year. About 85 per cent of its sales are in the US. ViacomCBS said its publishing arm reported pre-tax operating profit of $143 million.
Mr Rabe is banking on regulators taking a broad view of the books market and cited data from the Association of American Publishers (AAP) to argue the merged group’s share of sales would be below 20 per cent.
"Large publishers lost market share in recent years, whereas mid-sized small publishers gained," he said. "When you add to the mix the increasing role and importance of Amazon, self-publishing [and] new players, regulators are bound to conclude that this market is highly, highly competitive."
Tax structure
Mr Rabe argued the price reflected “the high profitability” of Simon & Schuster, a tax structure that was beneficial to Bertelsmann and the potential for significant cost savings in operations. Simon & Schuster will operate as a division within the Penguin Random House group.
“We will leave the publishing side of the business intact and we will integrate the backbone – the production and distribution and sales and marketing – and this will lead to lower costs and a higher quality of service,” he added.
ViacomCBS said the disposal would help fund areas such as streaming and dividends, and reduce debt.
– Copyright The Financial Times Limited 2020
