It’s not exactly a surprise, but the news has still created a lot of buzz: Pearson has announced its intent to sell off its share of Penguin Random House, which is the largest of the Big Five publishers. Collectively, PRH’s imprints account for one in four books sold every year.
First, a little background: Penguin and Random House first announced their merger in 2012 and completed it in 2013. Bertelsmann (the parent company of Random House, based in Germany) owns 53 percent of the company; Pearson (the parent company of Penguin, based in the UK), owns 47 percent of the company.
Pearson is now largely focused on the educational publishing sector (not trade); thus the industry sees the sale as a common-sense one. A buyout has been anticipated ever since the deal was made, since the terms gave Pearson exit rights three years after the merger. So here we are, pretty much right on schedule.
Pearson has a strong motivation to sell: the educational publishing business is in crisis and it needs the cash. Selling its stake could raise about £1.2 billion. During Digital Book World last week, Macmillan CEO John Sargent said, “In educational publishing, not only are the challenges of distribution changing, but the content is changing. You have rapid change in student buying behavior … a 12 percent net sales drop that has historically been a large-growth business…. There’s a bright future, but a difficult two to three years to get there, compounded by the fact that the ownership of the large publishers is private equity and leveraged. Dropping revenue in a private equity leveraged environment is very, very difficult.” Pearson’s projected profit this year is 19 percent below analysts’ estimates, as reported by Bloomberg.
Since 2015, Bertelsmann has indicated it would buy Pearson’s stake, but not necessarily all of it. Michael Cader of Publishers Lunch writes of the potential deal (subscription required), “It is considered likely that, if Pearson holds firm on selling the entire stake at once rather than in stages, as is their expected position, then Bertelsmann will look to bring in an outside partner—probably a private equity company—to help finance the buyout.”
Bottom line: At this time last year, Pearson announced layoffs that amounted to a 10 percent reduction in its workforce. Things are likely to get worse for Pearson before they get better, as strongly indicated by Sargent’s keynote at Digital Book World. We also took particular note of Sargent’s remarks about companies operating under private-equity ownership (rather than being publicly traded). Publishers that are more highly leveraged (carrying a lot of debt) are under more pressure to produce growth and profits on a quarterly basis; such conditions can be less favorable for author contracts, innovation, and long-term risk taking.
Jane Friedman has spent her entire career working in the publishing industry, with a focus on business reporting and author education. Established in 2015, her newsletter The Bottom Line provides nuanced market intelligence to thousands of authors and industry professionals; in 2023, she was named Publishing Commentator of the Year by Digital Book World.
Jane’s expertise regularly features in major media outlets such as The New York Times, The Atlantic, NPR, The Today Show, Wired, The Guardian, Fox News, and BBC. Her book, The Business of Being a Writer, Second Edition (The University of Chicago Press), is used as a classroom text by many writing and publishing degree programs. She reaches thousands through speaking engagements and workshops at diverse venues worldwide, including NYU’s Advanced Publishing Institute, Frankfurt Book Fair, and numerous MFA programs.
