Britain's Pearson has agreed to sell a 22 per cent stake in book publisher Penguin Random House to joint venture partner Bertelsmann for around $1 billion to bolster its balance sheet and return cash to shareholders.
Pearson, restructuring after a string of profit warnings from its education unit, said the sale would enable it to return 300 million pounds ($386 million) of surplus capital to shareholders via a share buyback.
The deal, which values the book publisher at an enterprise value of $3.55 billion, will also enable the two groups to recapitalise the business to produce a net debt to core earnings ratio of two times, giving the two partners a dividend.
Pearson, which reiterated its guidance for 2017, said its holding in Penguin Random House would fall to 25 per cent. It will be subject to an 18-month lock-up period from closing of the deal, during which it cannot sell any more of the stake.
Pearson said it now planned to pay a “sustainable and progressive” dividend that is comfortably covered by the earnings of its ongoing business, excluding any contribution from the book publisher.
Bertelsmann has no plans to buy the remaining 25 per cent of Penguin Random House from Pearson, its chief executive said after the German media group announced it was raising its stake in the publisher to 75 per cent.
“We have achieved our goal with the 75-per cent majority holding,” Thomas Rabe said in an interview published on Bertelsmann's internal website.
Success story
The joint venture — billed as the world’s leading mass publisher — was created in 2013 by combining Pearson’s Penguin imprint with Bertelsmann’s Random House.
“Penguin Random House is a success story... today the group is the clear worldwide number one in book publishing,” Bertelsmann chief executive Thomas Rabe said in a statement.
“Combining Penguin with Random House has proved to be a great publishing success, as well as enabling some big cost savings,” said Pearson Chief Executive John Fallon. “This has benefited readers, authors, and shareholders. 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.”
The German firm’s increased stake would bring it “more than 60 million euros” in additional profits attributable to shareholders, he added.
PRH groups together around 250 publishing houses with a total of around 15,000 new releases per year, generating USD 3.4 billion in revenue.
Among its top-selling titles are the US editions of George Martin’s weighty fantasy series “Game of Thrones”, as well as big—name authors like thriller writers John Grisham and Dan Brown or “Fifty Shades of Grey” creator E.L. James.
The group has also secured the rights to publish upcoming books from former US president Barack Obama and his wife Michelle.
Greater governance rights
Bertelsmann — a pillar of German media whose empire includes broadcaster RTL and magazine publisher Gruner + Jahr — said that the increased investment in PRH would allow it “greater governance rights” including naming the chairman of the board.
Penguin Random House chief executive Markus Dohle, who also sits on the Bertelsmann board, will continue to lead the publisher.
The deal is expected to complete in September 2017, subject to regulatory approval.
Back in January, Pearson issued a gloomy profit warning that sent its share price tumbling — and said it would sell holdings in PRH.
The company is largely dependent on the education market after it shed the Financial Times newspaper and half of the Economist Group in 2015.
In a radical restructuring in early 2016, Pearson axed 4,000 jobs — or ten per cent of its workforce — in an effort to combat weak demand.