News Corp has approached Pearson about a possible cash offer for its Penguin books business, threatening to derail talks about an all-share merger between Penguin and Bertelsmann's Random House division.
Bertelsmann, News Corp and Pearson , which owns Penguin and the Financial Times, declined to comment. One person familiar with the situation said an approach had been made "at the highest level" of Pearson, but cautioned that a firm bid would be subject to due diligence.
Two people familiar with Bertelsmann's position said it was racing to keep its planned merger on track after the Sunday Times, owned by News Corp, reported that Rupert Murdoch could offer about £1 billion to add Penguin to its HarperCollins publishing arm.
The German media group, led by Thomas Rabe, could struggle to find the funds to mount a counterbid for Penguin.
HarperCollins would offer Pearson, which makes three-quarters of its revenue from education, cash and a simple exit from the slowest-growing part of the group rather than a minority stake in an enlarged publishing joint venture, where Bertelsmann and Pearson would share cost savings.
Either deal is likely to require regulatory approval, but a bid for Penguin from HarperCollins could face less scrutiny than a merger with Random House, as Random House is already the market leader in most big countries. HarperCollins is third or fourth in most markets after Penguin.
Analysts had already seen the mooted Penguin-Random House merger as a potential first step towards a sale by Pearson. Marjorie Scardino's plan to hand over as chief executive to John Fallon, head of Pearson's international education division, had reignited speculation that Pearson might sell its non-education businesses, Penguin and the FT Group.
A Penguin takeover would significantly expand HarperCollins' book publishing unit and give it one of the industry's few strong consumer brands at a time when Mr. Murdoch is planning to split off News Corp's publishing assets and Australian holdings from its television and film businesses.
Like Random House, it could find savings from eliminating duplicated costs and strengthen its position with powerful ebook retailers such as Amazon, Apple and Google, and with physical bookstore chains such as Barnes & Noble.
Investors could query a decision to allocate capital to one of the slowest-growing sub-sectors in which News Corp operates, but the group is expected to end this fiscal year with more than $10 billion in cash, and to spin off the publishing company with no debt.
News Corp has not broken out details of HarperCollins' revenue or profitability, describing it in the last annual report as "a highly profitable publisher".
Morgan Stanley this month valued HarperCollins at $623 million, estimating its earnings before interest, tax, depreciation and amortization at $125 million. Bernstein Research on Friday valued Penguin, which reported operating profit of £110 million last year, at £831 million -£1.02 billion.
Penguin and HarperCollins were both targets of a Department of Justice investigation into alleged collusion on ebook pricing with Apple and three other publishers (excluding Random House). HarperCollins settled the case, but Penguin is still contesting it.
As a result, Penguin is still using the "agency" pricing model which allows it to set the retail price of its ebooks, while HarperCollins agreed to allow ebook retailers such as Amazon.com to discount prices.
In July, News Corp closed the purchase of Thomas Nelson, a Christian publisher, for an undisclosed sum.