Penguin-Random House merger talks lift Pearson

Pearson is discussing with Bertelsmann a possible combination of their Penguin and Random House 'trade' publishing businesses, with a possible view to the latter eventually assuming full control of the joint business unit via a buyout.

Pearson is discussing with Bertelsmann a possible combination of their Penguin and Random House 'trade' publishing businesses, with a possible view to the latter eventually assuming full control of the joint business unit via a buyout.

The last big combination among trade publishers occurred in 2006 when Hachette bought Time Warner's book division.

The potential move also follows years of talk in the industry about the need to consolidate in order to cut costs and better compete with the likes of Amazon (creator of the Kindle), Apple (home of the iBookstore) and Google (which pioneered digital book scanning).

As well, John Fallon, who becomes head of Pearson in the New Year, has headed up its international education division and it appears that the company wishes to eventually exit trade publishing and concentrate on its education division.

One possible significant obstacle which a joint-venture between both companies would have to overcome, is that together Penguin and Random House would create a dominant trade publisher with a 27% share in the UK.

Furthermore, Penguin is one of five publishers currently under scrutiny in the US over allegations of collusion to fix the retail price of ebooks.

It has also been mooted by the Financial Times that Bertelsmann will want a controlling stake. If so, there will also need to be a clear -and sufficiently enticing- exit strategy for Pearson. The result of the negotiations on the above point would also likely influence the choice of the person named to lead the new unit, the newspaper points out.

Also of interest for some is that the deal raises a question on how committed Pearson may be to keeping hold of the Financial Times.

Broker commentInvestec, whose analysts have a 'hold' rating on Pearson with a price target of 1240p, commented: "We view this as a possible net positive but not game changer - while we see some EPS [earnings per share] upside via near-term merger/cost synergies in a pressured top line business, this does not imply cash returns to shareholders or re-investment in long-term growth Education assets. If a move precedes exit of FT Group too, this would be good news."

Pearson's shares were gaining 0.69% to 1,220.36p in mid-morning trade.

CM

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