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  • Simon & Schuster’s Private-Equity Marriage Looks Good on Paper, but Will the Honeymoon Last?

    Simon & Schuster’s Private-Equity Marriage Looks Good on Paper, but Will the Honeymoon Last?

    In the newspaper world, a sale to private equity tends to feel like a funeral, with ink-stained wretches lamenting the slow and painful death of their industry. In the adjacent world of book publishing, the news this week that KKR would acquire Simon & Schuster from Paramount Global hardly seemed so grim.

    “In the spring of 2023, we began a series of fascinating and stimulating conversations with members of KKR’s Media and Entertainment industry team about every aspect of our business, reflective of their keen interest in acquiring our company. All of us from Simon & Schuster who participated came away from those conversations impressed by KKR’s acumen, as well as their team’s desire to help our business grow and thrive in the future,” S&S boss Jonathan Karp wrote in a company-wide email Monday afternoon, right as the sale was announced ahead of Paramount Global’s latest quarterly earnings call. “That commitment to growth is one of the reasons I’m so glad KKR will be our next owner.”

    Karp, who is one of the most successful people in publishing, has good reason to celebrate on a personal level. If S&S had gone to, say, HarperCollins, it’s possible he might have found himself the odd man out. In either case, of course Karp was going to convey an upbeat assessment to his 1,600-plus worker bees, who have essentially spent the past two and a half years in limbo. It began in late 2020, when S&S’s parent company—then known as ViacomCBS—struck a deal for the publisher to be sold to Penguin Random House, the biggest of the Big Five publishers. The Biden administration challenged the deal, leading to a protracted legal battle between PRH and a consolidation-averse Department of Justice. The showdown culminated last fall when a federal judge ruled in favor of the DOJ, kiboshing the acquisition once and for all and sending Paramount Global back to the drawing board. In this sense, anyone employed by S&S is probably just relieved to finally know who their new overlords are going to be.

    Still, there’s reason to believe that Karp’s happy talk isn’t just hot air. Exhibit A: the involvement of Richard Sarnoff, who leads KKR’s media and entertainment team. Sure, Sarnoff’s undergraduate art history degree from Princeton suggests he’s a cultured fellow and not just some soulless finance shark. But it’s a different notch on his résumé that is most germane to the matter at hand: Sarnoff himself is a former book-publishing executive, serving in the early 2000s as chief financial officer of, ironically enough, Random House. (He also chaired the Association of American Publishers during that time.)

    As far as I can tell, the man has a good rep. Sources in the know described him as “very smart,” a “great guy,” and a “book person.” Karp, who overlapped with Sarnoff at Random House (where Karp eventually rose to editor in chief) was similarly effusive in his company note: “I have known and admired…Richard Sarnoff for two decades…. Richard understands the nuances of the book business as well as anyone I know.”

    Sarnoff told the Associated Press that no layoffs are planned, and in his own boilerplate message about the sale, he declared, “We see a compelling opportunity to help Simon & Schuster become an even stronger partner to literary talent by investing in the expansion of the company’s capabilities and distribution networks across mediums and markets while maintaining its 99-year legacy of editorial independence.”

    The icing on the cake is that the S&S crew will get an ownership stake once the sale closes. (And it is expected to close this time, since KKR ownership won’t raise the kind of antitrust alarms that a rival major publisher would.) For context, as part of KKR’s flip of the audiobook company RBmedia, now being offloaded to the investment firm H.I.G. Capital, the average payout once the ink dries is expected to be a year’s pay or a minimum of $50,000. Here’s Karp again: “Of all the prospective buyers we spoke to—and there were a lot of them—KKR was the only one that discussed its plans to support Simon & Schuster in creating an equity ownership program to provide all of our employees with the opportunity to participate in the benefits of ownership after the transaction closes.” 

    Joe Pompeo

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  • With Penguin Random House Out of the Picture, What Happens to Simon & Schuster Now?

    With Penguin Random House Out of the Picture, What Happens to Simon & Schuster Now?

    Simon & Schuster has plenty to be thankful for this Thanksgiving. New books from Bob Dylan and Mike Pence have been lighting up the best-seller lists, as has Jennette McCurdy’s I’m Glad My Mom Died, now enjoying its 14th week in the upper echelons of The New York Times’ top nonfiction releases. That’s to say nothing of Colleen Hoover, the TikTok-propelled book-sales behemoth who has helped make S&S, as one veteran publishing source put it, “by far the most profitable company in the industry.” Hoover’s new novel, It Starts With Us, dropped on October 18, immediately becoming, in the words of CEO Jonathan Karp, a “worldwide publishing phenomenon and #1 bestseller in all of Simon & Schuster’s international territories.” At the time of this writing, it was number one in most-sold fiction on Amazon and number one on the Times’ best-seller list for combined print and e-book fiction, with Hoover continuing to hold the top five slots for paperback trade fiction.

    And yet, despite these successes, and regardless of its market strength—which will no doubt get an extra jolt from the holiday shopping season—S&S is closing out 2022 amid a cloud of uncertainty. Just about two weeks after Hoover’s latest bestseller hit shelves, a federal judge sided with the Department of Justice in its lawsuit to stop the company’s acquisition by America’s largest book publisher, Penguin Random House, a deal that would have turned the nation’s Big Five publishing houses into the Big Four, giving PRH a 49% share of the marketplace. The ruling slammed the brakes on a combo that would have further consolidated the book world, while also demonstrating how the Biden administration isn’t messing around when it comes to antitrust enforcement. “PRH’s acquisition of S&S,” wrote Judge Florence Pan in an 80-page decision issued on Halloween, “is likely to substantially lessen competition [for] ‘the publishing rights to anticipated top-selling books.’ … The government has presented a compelling case that predicts substantial harm to competition as a result of the proposed merger.”

    Any glimmer of hope that a successful appeal might be able to salvage the $2 billion merger evaporated late Monday afternoon, when an SEC filing landed from Simon & Schuster’s parent company, Paramount Global: “Paramount terminated the Purchase Agreement in accordance with its terms. Penguin Random House is obligated to pay a $200 million termination fee to Paramount.” PRH, owned by the German conglomerate Bertelsmann, followed with its own statement: “We did everything possible to complete the acquisition. We believe the judge’s ruling is wrong and planned to appeal the decision, confident we could make a compelling and persuasive argument to reverse the lower court ruling on appeal. However, we have to accept Paramount’s decision not to move forward.”

    Paramount’s termination of the purchase agreement raises the obvious question of where this leaves S&S, which has been grappling with its fate ever since it was put on the block more than two years ago. In a note to employees, Karp sought to allay anxieties: “This news is still fresh, and at this point I have no specific information to impart about what will happen in the coming months. You may read or hear rumors and speculation about our future, but you can be assured that I will keep you informed as soon as there is pertinent news I can share.”

    What now? In a nutshell, it’s back to the old drawing board for Paramount Global, which remains firm in its determination that S&S is a “non-core asset” and “therefore does not fit strategically within Paramount’s broader portfolio” of video-based assets—CBS, Showtime, the former Viacom networks, the Paramount+ streaming service, etc. Even before Pan’s decision came down, Bakish had privately reiterated that Paramount wasn’t having second thoughts about selling S&S, which I’m told will remain a “discontinued operation” in Paramount Global’s quarterly earnings calculations. With the holidays upon us, it will take a bit of time for the M&A process to really get going again. But the company does expect interest, as one source put it, from “a mix of strategic and financial buyers.”

    That’s the jargonistic way of saying there will presumably be interest from “other big publishing companies” and “private equity.” Let’s begin with the latter. It would be a scenario akin to, say, Elliott Management’s 2019 acquisition of Barnes & Noble, which, it’s worth noting, hardly seems like a disaster thus far. Nevertheless, the words private equity are enough to send shivers down the spine of any editorially minded person. PRH argued at trial that if the sale didn’t go through, Paramount might sell to a firm with little publishing knowledge, which would take on debt and “gut” S&S. The judge was unmoved. “Those arguments are not relevant to the Court’s analysis of the government’s claim,” Pan wrote in her decision, noting that “the expressed concerns about a private-equity acquisition are highly speculative.” Who might such an acquirer be, in any case? The Wall Street Journal has reported there’s been interest from KKR, which, as one of my sources noted, could potentially find synergies between S&S and the audiobook business that KKR acquired in 2018, RBmedia.

    As for so-called strategic buyers, those would be Hachette and HarperCollins, whose executives testified during the trial that they’d still like their companies to own S&S. (Both were outbid the first time around.) Each company is smaller than PRH and therefore arguably not as much of a threat to competition. (“What’s the threshold?” one source wondered.) But there’s no guarantee that the DOJ wouldn’t also seek to prevent an S&S-Hachette or an S&S-HarperCollins mash-up. In either scenario, the Big Five would still become the Big Four, and the Biden administration has strongly signaled that it wants less consolidation, not more. All of which is to say that none of Simon & Schuster’s options seem particularly rosy or cut and dried.

    Whatever the future holds, S&S executives will have plenty to toast when they host the company’s holiday party next month. Profits were up 29% year over year for the first nine months of 2022, and sales revenue rose 10% during the third quarter. During the first quarter of the year, Simon & Schuster’s total revenue was up 17%, to $217 million, while operating income rose to $50 million, an 85% increase. In his note to staff on Monday, Karp sounded a note of optimism. “Simon & Schuster has never been more profitable and valuable than it is today,” he wrote. “We’ll be starting the new year with some tremendously exciting, sure-to-be-bestselling titles, which will be buttressed by the sales of what is currently the best-selling backlist in the publishing industry. As I have noted before, we will be celebrating our 100th anniversary in April of 2024, regardless of who our owner is—and we will have much to celebrate.”

    Joe Pompeo

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