Possible Tie-Up Between Penguin and Random House

on Oct 26, 2012
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Two of the world’s largest book publishers are in talks over a merger that could create a publishing powerhouse comprising up to 25 percent of Britain’s book market.

Random House and Penguin, respectively owned by Bertelsmann (FRA:BTG4) and Pearson (LON:PSON), are still managing to sell books worth £1.4 billion annually despite readers’ shift in preference from physical to electronic copies.
The German-owned Random House has greatly benefited this year from record-breaking sales of E.L. James’s Fifty Shades trilogy with 30 million copies sold at last count. Other authors in its arsenal include David Mitchell, John Grisham and recent Nobel prizewinner Mo Yan. The publisher is Britain’s biggest with a 16 percent market share. Penguin, founded by Agatha Christie’s publisher in 1935, is third in the ranking with a 9 percent share.

“Pearson confirms that it is discussing with Bertelsmann a possible combination of Penguin and Random House,” a company statement said. “The two companies have not reached agreement and there is no certainty that the discussions will lead to a transaction. A further announcement will be made if and when appropriate.”
!m[Britain’s Publishers Consider Mergers and Other Cost-Cutting Strategies Against Increasing Amazon Competition](/uploads/story/650/thumbs/pic1_inline.png)If there is a tie-up, the privately-held media group Bertelsmann is expected to hold the majority ownership. Alex DeGroote, analyst at Panmure Gordon, told The Times that a combined company would find back-office cost savings and could have more sway with technology companies such as Google, Amazon and Apple. “It would enhance their combined clout with those new retail forces.” Mr DeGroote opined.

**British Publishers to Be Rescued from Amazon’s Tax Exploitation**
The European Commission ordered Luxembourg to close a VAT loophole, which allowed Amazon to pay only a 3 percent VAT when it sells an ebook to a British reader, instead of the 20 percent charged in the UK. The company specifically chose to be based in Luxembourg to take advantage of the significantly lower VAT. Furthermore The Guardian investigated and concluded that Amazon is forcing British publishers to cover the cost of the 20 percent VAT charge on ebook sales despite the true costs being only a fraction of that.

According to a contract seen by The Guardian, Amazon begins its negotiations with publishers on the stipulation that the VAT is 20 percent and must be knocked off the cost price, meaning that it makes a supplementary profit from the loophole of about £1.38 on a £10 ebook. The company proceeds to negotiate further discounts of up to 65 percent, achieving unfairly large margins. Publishers don’t have much of a choice as Amazon has a monopoly on the British ebook market with a 90 percent market share.

The European Commission, the EU’s executive arm, gave Luxembourg 30 days to close the aforementioned loophole and increase the VAT rate on digital services from 3 to 15 percent. If Luxembourg doesn’t meet the requirement by the end of November it risks being referred to the European court of justice. France has also received a similar warning over its 7 percent VAT rate on digital services.

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