Bertelsmann has agreed to buy Simon & Schuster for almost $2.2bn, with the German media group insisting it is “very confident” antitrust regulators will be comfortable with its towering position in the US books market.
The $2.18bn pricetag for ViacomCBS’s publishing arm is almost double some initial estimates and is about 15 times Simon & Schuster’s pre-tax 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 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 Thomas Rabe told the Financial Times. “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.
Mr Rabe rejected the market concerns raised by Robert Thomson, News Corp chief executive, 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,” he 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.”
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 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 2m 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 $814m last year. About 85 per cent of its sales are in the US. ViacomCBS said its publishing arm reported pre-tax operating profit of $143m.
Mr Rabe is banking on regulators taking a broad view of the books market, and cites Association of American Publishers data to argue the merged group’s share of sales would be below 20 per cent.
“Large publishers lost market share in recent years, whereas midsized small publishers gained,” he added. “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.”
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,” Mr Rabe said.