BETTING ON PRINT
Bertelsmann to boost stake in Penguin Random House as sales of physical books rise
A German media giant is investing in physical books as numbers show print remains popular,
Remember books — you know, those things printed in ink on paper? They’ve been killed by the advent of e-readers such as the Kobo and the Amazon Kindle, right? Nope. Sales of physical books have risen for the past three years in the U.S. and Thomas Rabe sees big profits in selling them.
Publishing “is and will remain one of our strategic core businesses,” says the chief executive officer of Bertelsmann, a German conglomerate founded in 1835 as a printer of church hymns that today employs 117,000 in TV, magazines, education and more.
Rabe is poised to boost his 53-percent stake in Penguin Random House after partner Pearson said it plans to sell its 47-per-cent share. The two companies merged their publishing assets in 2012 to gain more clout with the likes of Amazon.com, Apple and Google. Penguin Random House, the world’s No.1 book publisher, in 2015 increased sales to 3.7 billion euros (about $4 billion U.S.) from 2.7 billion euros (about $2.9 billion) in 2013.
That’s thanks to its foothold in fastgrowing markets such as India and blockbusters such as Paula Hawkins’s thriller The Girl on the Train and E.L. James’s Fifty Shades series. In 2015, profits at the publisher jumped by more than half from the year before to 557 million euros (about $595 million) and Pearson’s stake could fetch $1.5 billion, Liberum Capital estimates.
Pearson announced the sale on Jan. 18 as it acknowledged major challenges in its biggest business, U.S. higher education, after months of optimistic forecasts from CEO John Fallon. College enrolments and textbook sales have proved weaker than expected, spurring him to seek ways to shore up the balance sheet.
The bad news triggered a sell-off at Pearson — its shares lost a quarter of their value, their worst day ever — and put Fallon’s job in jeopardy. Offloading Penguin Random House would be the company’s third A-list divestment since 2015, when it sold the Financial Times and its stake in the Economist Group.
Fallon failed to build “a working model that is suitable for current times,” says Stephen Williams, an analyst at fund manager Brewin Dolphin.
While Bertelsmann, controlled by Germany’s billionaire Mohn family, hasn’t laid out any specifics, Rabe says he’s interested in buying out Pearson. “We will do everything to guide this business to further growth,” he says.
Doubling down on books would represent a big bet on an industry that . . . was being written off as an analog dinosaur
A purchase would follow Rabe’s pattern of increasing his commitment to what he sees as key industries. In 2014, he bought the 25 per cent of German magazine publisher Gruner + Jahr that Bertelsmann didn’t own, ending a 45-year-old partnership with the Jahr family. A year earlier, Bertelsmann took over full ownership of music publisher BMG Rights Management from private equity house KKR.
Doubling down on books would represent a big bet on an industry that just a few years back was being written off as an analog dinosaur stumbling through the digital jungle.
If you look at data since the turn of the century, with the rise of digital titles, audio books and self-publishing (which cuts out the likes of Penguin Random House), there’s cause for concern. Publishers’ revenue has been largely unchanged this decade and the information from book categories that were once big moneymakers — think dictionaries, encyclopedias and atlases — can now be accessed online for free.
Yet books still produce healthy margins for giants that benefit from economies of scale as they churn out hits from bestselling authors. Penguin Random House, which owns 250 publishers on five continents, released five of the 10 bestselling print books in the U.S. last year.