Germany’s Bertelsmann to buy Random House

Deal thought to be worth $1 bil

S.I. Newhouse’s Advance Publications stunned the publishing world Monday when it agreed to sell Random House, the No. 1 adult trade publisher, to German media giant Bertelsmann AG for an undisclosed price, thought to be about $1 billion.

The deal makes Bertelsmann a Goliath in the industry at a time when it is facing big challenges, ranging from the rise of superstore retailers like Barnes & Noble to economic stresses resulting from increasing book returns and rising advances.

Bertelsmann already owns Bantam Doubleday Dell Publishing, and the acquisition more than doubles Bertelsmann’s market share in the adult trade market to as much as 10%, significantly higher than the No. 2 and No 3. players, News Corp.’s Harper-Collins and Viacom Inc.’s Simon & Schuster.

Advance, which also owns magazine publisher Conde Nast, the New Yorker, newspapers and some cable systems, decided to sell so it could “focus its efforts on the management and expansion” of these core businesses, Advance chairman S.I. Newhouse Jr. said in a statement.

Bertelsmann, huge in book publishing outside the U.S., has been vocal about its desire to expand in U.S. book publishing in recent months. Bertelsmann exec board member Thomas Middelhoff has spent much of the past year attempting to negotiate an acquisition, meeting with both HarperCollins and Simon & Schuster.

Bertelsmann execs insisted their plan to expand in the U.S. was not aimed at increasing their market power. “It’s not a question of size,” said one Bertelsmann insider. “It’s a question of opportunity.”

“Each imprint will maintain its own unique profile and editorial teams,” said Peter Olson, who will be chairman and CEO of the new company. “These two companies are solid and strong — premier names in the industry. We’ll continue to build on our strengths.”

“This is the most visible example of the consolidation that is going on,” in the book industry, said Simon & Schuster president and CEO Jonathan Newcomb.

Newcomb said the emergence of a much bigger player “will help even out some of the balance between retail distribution and the publishing community” as “a larger player speaks with a little bit different voice than a more fragmented industry.”

The bigger size also improves economics of scale in areas like order processing, Newcomb said.

Bertelsmann chairman Mark Woessner told a press conference in Munich that after the deal Bertelsmann’s U.S. book sales would be between $1.4 billion and $1.6 billion. Before the deal Bantam Doubleday Dell’s revenue was about $600 million, while Random’s total annual sales were estimated to be about $900 million-$1 billion.

In comparison, HarperCollins’ annual revenues from adult trade were $737 million in 1996, according to industry monitor Subtext, while Simon & Schuster’s adult trade revenues last year are believed to have been about $600 million (Simon & Schuster is much bigger in the educational and professional publishing areas; those companies are now on the market).

People close to Random House said it was profitable on a cash flow basis (earnings before interest, taxes, depreciation and amortization), although the company doesn’t disclose financial details. But they conceded it had been hurt by changes in the industry. “It’s under pressure … there has clearly been a squeeze going on in adult publishing,” said one person close to the situation. In 1996, for instance, adult trade sales fell 4%, Subtext estimated.

But sources emphasized these pressures were not a factor in Newhouse’s decision to sell. One said Bertelsmann convinced Newhouse that “there is more value in having two together than having each separate.”

Newhouse was also conscious of the competitive impact on Random House of Bertelsmann buying another major publisher, sources said.

The consolidation worries many in the industry. One literary agent noted that this could be “bad for agents because it further consolidates the publishing business.”

“Random House is such a U.S. institution. A deal like this is disorienting. What it means is that U.S. publishing will be dominated by a German company. It’s illustrative of foreign ownership being on the rise” in the industry, said Glenn Sanislo, co-publisher of Subtext.

The deal requires antitrust regulatory approval. Sanislo said, “A deal of this size has to be scrutinized carefully. My gut reaction is that these companies are both so big in trade already that they may have problems getting the deal to go through.”

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