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Penguin and Random House in Deal Talks

Bertelsmann and Pearson are in talks about combining their publishing divisions, Random House and Penguin, to create a global market leader in response to the strategic challenges of the fast-growing ebook business.

Joseph Devenne | Getty Images

Discussions have focused on a tie-up in which Bertelsmann would have a stake of more than 50 per cent, according to several people familiar with the negotiations, who warned that several issues remained unresolved and talks could still fall apart.

Pearson, which owns the Financial Times, confirmed discussions about "a possible combination" of the two publishers after FT.com reported the talks. "The two companies have not reached agreement and there is no certainty that the discussions will lead to a transaction," it said. Bertelsmann, whose senior executives were in China, declined to comment.

The negotiations come at a time when large technology groups such as Amazon, Apple and Google are driving the ebook business and redefining the publishing industry.

Analysts have predicted consolidation among the "big six" market leaders of the relatively fragmented publishing industry, citing shifts in the balance of power in an industry where independent bookstores are giving way to national chains and large technology companies who control ebook stores.

"This is the lowest margin business within Pearson, and in an industry in flux there are reasons to combine forces and tackle technology challenges," said Tim Nollen, a Macquarie Securities analyst.

However, a combination of two of the world's top four publishers may face scrutiny from competition authorities in various markets. Market shares move with the bestseller lists, but the combined group could control about a quarter of US and UK book and ebook sales.

The Department of Justice this year sued Apple and five publishers, including Penguin but excluding Random House, alleging collusion. Three publishers settled the case, which did not address competition issues. Penguin is still contesting the matter.

The terms of any deal are still under debate, people familiar with the talks said, but a successful merger would give each company more scale.

Bernstein Research this year valued Penguin at up to £900m while Investec this month put Penguin's valuation lower, at about £650m. Analysts' valuations were not immediately available for Random House, whose parent company is privately held.

The negotiations, first reported by Manager magazine in Germany, come as Thomas Rabe, appointed chief executive of Bertelsmann last year, is looking to expand the German media group's revenues in emerging markets such as India, China and Brazil, where Penguin has built a strong position.

They also come as Marjorie Scardino is preparing to hand over as chief executive of Pearson to John Fallon, the former head of the group's international education business, on January 1.

News of the succession plans heightened speculation among analysts of corporate activity at the London-listed group, which now makes three-quarters of its revenues from education.

If the merger talks are successful, both Markus Dohle, chief executive of Random House, and John Makinson, chief executive of Penguin, are expected to take senior leadership roles.

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