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How Penguin is close to taking control of 30% of the entire global publishing market

Merger will see the new company use its new clout with technology giants such as Amazon and Apple, says Katherine Rushton

One of the disappointments of Penguin's €2.99bn merger with Random House was the missed opportunity for a pun.

There will be no Random Penguin or Penguin House, as many book publishers and commentators had hoped. Instead, the merged company will be more conservatively named Penguin Random House.

"Random Penguin did come into conversation, but it hurt the penguin's feelings," joked Marjorie Scardino, chief executive of Penguin's parent company, Pearson.

It was not an altogether throwaway remark. The mega deal, which will see Random House and Penguin join forces as the biggest publishing company in the world, hands Pearson rather more power than its balance sheet alone would suggest.

Analysts had expected a 60/40 equity split in favour of Bertelsmann, the German media empire behind Random House, the publisher of the best-selling novel 'Fifty Shades of Grey' by EL James. But instead Bertelsmann took 53pc and Pearson took the rest.

Pearson's man, Penguin's chairman and chief executive John Makinson, also took the top job as chairman of the merged business, while Random House boss Markus Dohle plumped for the chief executive position. The carve-up of power is "recognition of our value that is not just profits and revenues", said Ms Scardino. In other words, Pearson gets an extra 7pc stake in recognition of the Penguin brand.

The iconic bird, which has been appearing on the company's paperbacks since 1935, is arguably one of the key drivers of this deal. A few travel and reference series aside, Penguin is the only major publisher to have a proper consumer brand at all. Random House and its rival Hachette might be enormous businesses, but very few book buyers are going to reach for their titles because of the logo on the spine.

"You cannot buy that recognition. It takes a lifetime to achieve," said Peter Straus, president of the Association of Authors and Agents, and a literary agent at Rogers, Coleridge & White. Although Pearson and Bertelsmann have made it clear they want the merger to boost their clout with technology giants such as Amazon and Apple, they have been circumspect about the details, alluding only to "increased digital investments". The notion of them cutting out the middle-man, the retailer, does not seem too far-fetched.

They will have a fair few hurdles to jump before they get the deal off the ground, however -- something even Pearson and Bertelsmann do not envisage happening until the latter half of next year. The merged Penguin Random House will have between 25pc and 30pc of the global publishing market and considerably more in certain genres such as travel, where Random House owns Fodor's guides and Penguin has Rough Guides and Dorling Kindersley. This deal feels like a dead cert for referral to the competition authorities.

At the moment, Pearson and Bertelsmann are both confident they will win approval, but analysts think there is a 50/50 chance that the company will be forced to sell off some of its "imprints", such as Ebury or Viking, which operate like fiefdoms within each publisher, each with their own style and list of books. Paul Richards, an analyst at Numis, draws parallels with Universal's recent €1.49bn takeover of EMI, which only won regulatory approval on condition that Universal sold off valuable labels.

Certainly authors and literary agents are wary. "Eventually there will be less competition and fewer imprints to go to (to sell book deals)," said Carole Blake, an agent at Blake Friedmann, although she expects the deal to be rubber-stamped. "Competition authorities have been lily-livered with regard to publishing mergers in the past. I don't expect them to behave differently this time unless they become jingoistic about not selling to the Germans," she said.

Meanwhile, the Penguin Random House merger is also expected to fire the starting gun on a new wave of consolidation in what is still a relatively fragmented industry.

"I can see why News Corporation made a last-minute approach," said Mr Richards, referring to its 11th-hour attempt to engineer an alternative tie-up between Penguin and its own publishing division, HarperCollins. "Most of the other big players have got 9pc, 10pc, 11pc market share. If you put Penguin and Random House together there is suddenly a lot of water between them and the next biggest player. This industry could quickly go from having a 'Big Six' to maybe three or four."

Simon & Schuster and HarperCollins, which are both owned by American media conglomerates, could make a natural fit, he says.

The French-owned Hachette and Germany's Macmillan are also likely to be looking for bedfellows. This time, however, there will be no word games to be had.

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