Pearson has confirmed publishing firm Random House is to merge with its venerable book seller Penguin.
The news came as Pearson released figures that showed in the first nine months of the year Penguin revenues fell 1% compared to the same period in 2011.
Under the terms of the agreement, Penguin and Random House will combine their businesses in a newly-created joint venture named Penguin Random House.
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However, it will not be a merger of equals, with Bertelsmann to own 53% of the joint venture and Pearson to own 47%.
Marjorie Scardino, Chief Executive of Pearson, said the combination would "greatly enhance" Penguin's fortunes and its opportunities.
There had been reports that News International had joined the race with a bid for Penguin worth in the region of £1bn.
The joint venture will exclude Bertelsmann's trade publishing business in Germany and Pearson will retain rights to use the Penguin brand in education markets worldwide.
Bertelsmann will nominate five directors to the board of Penguin Random House and Pearson will nominate four.
John Makinson, currently Chairman and Chief Executive of Penguin, will be Chairman of Penguin Random House and Markus Dohle, currently Chief Executive of Random House, will be its Chief Executive.
Pearson said that, "in reviewing the long-term trends and considerable change affecting the consumer publishing industry, Pearson and Bertelsmann both concluded that the publishing and commercial success of Penguin and Random House can best be sustained and enhanced through a partnership with another major international publishing house".
"They believe that the combined organisation will have a stronger platform and greater resources to invest in rich content, new digital publishing models and high-growth emerging markets," the statement said.
"The organisation will generate synergies from shared resources such as warehousing, distribution, printing and central functions.
"Pearson and Bertelsmann intend that the combined organisation's level of organic investment in authors and new product models will exceed the total investment of Penguin and Random House as independent publishing houses."
Under the terms of the deal neither Pearson nor Bertelsmann may sell any part of their shareholding in Penguin Random House for three years.
To protect Pearson's interests as a minority shareholder, if Bertelsmann declines a Pearson offer to sell its entire shareholding, Pearson can force Penguin Random House to raise debt of up to 3.5x EBITDA (earnings before interest, tax, depreciation, amortisation) with a dividend distributed to shareholders in line with their ownership.
In addition, from five years after completion, either partner may require an IPO of Penguin Random House.
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