ViacomCBS Is Selling Its Book Publisher for $2.2 Billion. What It Means for the Stock.

By Nicholas Jasinski

ViacomCBS has agreed to sell Simon & Schuster to the German media company Bertelsmann for nearly $2.2 billion in cash, the companies said. It’s a big number for the book-publishing subsidiary and a significant step in the continuing consolidation of that industry.

Since the merger of Viacom and CBS last year, the combined company has undertaken a review of its portfolio with an eye toward divesting divisions not core to its new streaming-focused mission. A sale of the book business, whose roster of authors includes Stephen King, Judy Blume, and Ernest Hemingway, had been expected soon. CBS’s “Black Rock” headquarters in midtown Manhattan is also for sale, the company has said. 

ViacomCBS stock (ticker: VIAC) had rallied almost 20% since the start of November, but fell 1% in Wednesday morning trading. Call it selling the news. 

Bertelsmann stock (BTG.Germany) was up 0.2% in late-afternoon trading in Frankfurt, giving up a nearly 4% gain earlier in the day. The deal gives the company—which owns Penguin Random House, the biggest English-language book publisher—still more exposure to the U.S. market. 

ViacomCBS says it will use proceeds from the sale to invest in its streaming services: the soon-to-be-rebranded Paramount+—currently CBS All Access—Showtime, and Pluto TV. It will also put the funds toward its dividend and paying down debt. 

Slimming the business down to just TV and movie studios and related distribution assets could make ViacomCBS a more attractive acquisition target itself down the road. Its market capitalization is about $21 billion after the recent weeks’ rally, but that pales in comparison to the valuations of streaming competitors like Walt Disney (DIS), Netflix (NFLX), or Amazon.com (AMZN).Media Stocks In a Coronavirus MarketYear-To-Date PerformanceSource: FactSet%Netflix Inc.S&P 500 IndexWalt Disney Co.AMC Networks Inc. ClADiscovery Inc. SeriesAViacomCBS Inc. Cl BFox Corp. Cl A2020Nov.-75-50-250255075

Simon & Schuster is coming off a strong third quarter, thanks to Too Much and Never Enough: How My Family Created the World’s Most Dangerous Man, by Mary Trump; and Rage, by Bob Woodward. Revenues were up 29% year over year, to $279 million, while ViacomCBS’s preferred profit measure—adjusted operating income before depreciation and amortization—was up 6%, to $58 million, at the segment. Simon & Schuster’s sales have totaled about $820 million in each of the past three years.

HarperCollins’s owner News Corp (NWSA), France’s Vivendi (VIVHY), which has a stake in Hachette, and several financial bidders had reportedly been interestedin Simon & Schuster. News Corp is Barron’s parent company.

Penguin Random House is already the U.S.’s biggest publishing house—with over $4 billion in sales last year—and it will meaningfully extend its lead with the acquisition. Like in ViacomCBS’s television and movie businesses, there has been a wave of consolidation in the book publishing industry in recent years. 

Wednesday’s move is just the latest—and the largest—in a push for scale. Penguin Group and Random House themselves were combined in 2013, when Bertelsmann and now education-focused Pearson (PSO) merged their publishing houses. Bertelsmann bought out Pearson’s 47% stake in a pair of transactions in 2017 and 2019, the latter valuing the entire unit at $2.7 billion.

More authors and titles under one roof gives book publishers greater negotiating power with the likes of Amazon and Barnes & Noble over pricing. It also means deeper pockets when bidding for author talent and upcoming titles.

ViacomCBS expects the deal to close some time next year, pending regulatory approval. In a statement on Wednesday, News Corp CEO Robert Thomson said he saw antitrust issues with a combination of Simon & Schuster and Penguin Random House.

“There is clearly no market logic to a bid of that size – only anti-market logic,” Thomson said. “Bertelsmann is not just buying a book publisher, but buying market dominance as a book behemoth. Distributors, retailers, authors, and readers would be paying for this proposed deal for a very long time to come. This literary leviathan would have 70 percent of the U.S. Literary and General Fiction market. There will certainly be legal books written about this deal, though I wonder if Bertelsmann would publish them.”

HarperCollins, the No. 2 player in the industry, had about $1.7 billion in sales in its latest fiscal year, which ends in June. ViacomCBS will receive a termination fee from Bertelsmann if the sale is blocked by regulators.

ViacomCBS and Bertelsmann both separately declined to comment on Thomson’s remarks.

Bertelsmann plans to keep Simon & Schuster as a separate unit under Penguin Random House. Simon & Schuster’s current CEO, Jonathan Karp, will remain in charge.https://tpc.googlesyndication.com/safeframe/1-0-37/html/container.html

ViacomCBS stock has lost about 17% after dividends in 2020, versus a 14% return for the S&P 500. Other media firms have also lagged the market: Disney is up 2%, Fox Corp (FOXA) has lost 20%, and Discovery (DISCA) is off 17%.