Education and media publisher Pearson said the newly created joint venture, which will bring under one roof fantasy novelist Terry Pratchett, Fifty Shades of Grey author EL James and 2012 Nobel prize winner Mo Yan, would be named Penguin Random House.
Confirmation of a deal came after months of Pearson board discussions and despite an informal approach from Murdoch's News Corp, which was interested in combining Penguin with its own Harper Collins publishing unit, a person familiar with the situation said.
"The consumer publishing industry is going through a period of tumultuous change, propelled by digital technologies and the giant companies that dominate them," Pearson chief executive Marjorie Scardino said in an email to staff.
"The book publishing industry today is remarkable for being composed of a few large, and a lot of relatively small companies, and there probably isn't room for them all – they're going to have to get together."
Under the plans, Bertelsmann will own 53% of the venture and nominate five directors to the board, while Pearson would own the rest and nominate four.
Both must retain their share in the venture for at least three years. Penguin chairperson and CEO John Makinson will be chairperson of the new venture, and Random House chief executive Markus Dohle will be CEO. Analysts said they would have preferred a bid from a group such as News Corp, which would have brought cash into the company and enabled Pearson to quit a market that has been hit by the rapid growth of the ebook and the control it has given to major distributors such as Amazon and Apple.
The industry has also been hit in certain markets such as Britain by fierce pricing pressure from supermarkets. Pearson said the merger would provide significant synergies and the opportunity to spend more on the new technologies transforming the industry.
"Together, the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers," Scardino said.
The two groups did not break out the potential synergies but said they would save money on joint warehousing, distribution, printing and central functions. Bankers UBS estimated possible savings of 10% of their combined cost base. A joint venture will also allow Pearson to retain a link between its education division and the world-renowned Penguin brand. And it also avoids a large tax bill in the United States, which would have been incurred had Penguin Books been sold.
"We can see why Pearson has chosen this option, but there may be some disappointment there is no outright sale, and especially with the lock-in of the stake," Liberum said.
In the first nine months of 2012, Random House was the biggest book publisher in the two major English language markets of the US and Britain, boosted by the huge success of the Fifty Shades trilogy, which sold more than 30-million copies between March and June, with sales evenly divided between the trade paperback and ebook editions.
Penguin was second in the US and third in Britain, behind Hachette. Pearson said the joint venture could raise debt after three years to pay both sides a dividend if Bertelsmann turns down an offer to buy out the British-based group, while either side could require an IPO after five years.
Shares in Pearson were down 0.8% at 1 211 pence at 1000 GMT, while the broader London market was down 0.6%.
October has been a busy month for Pearson. On October 3 Scardino said she would step down at the end of the year after 16 years, prompting analysts to wonder if the group would sell off its last remaining media assets and focus wholly on its dominant education arm. Later in the month Pearson said it had bought educational services company EmbanetCompass for $650-million in cash to bolster its position in the online market.
Bertelsmann, Europe's biggest media group and owner of European TV broadcaster RTL Group, is also in the middle of an overhaul to catch up with rapidly changing markets. Random House is strong in Britain and the United States, while Penguin – founded in 1935 by publisher Allen Lane, who decided the mass market needed cheap paperbacks after finding nothing to read at a railway station – is the world's most famous publishing brand, with a strong presence in fast-growing developing markets.
Both groups have had to invest in the launch of ebooks. They made up 22% of Random House's global business in the first half of 2012, compared with around 20% for Penguin. Analysts say regulators will want to look at the tie-up, but with a joint market share of around 25% in the United States and Britain, they expect it will go through. In 2011, Random House had revenues of $2.4-billion.
Penguin reported revenues of £1-billion and operating profit of £111-million. Pearson also published a trading update, showing sales up 5% in the first nine months but operating profit down 5%, reflecting the sale of assets, acquisition costs and weakness in the British professional training market. – Reuters