Penguin and Random House in merger talks

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Successful deal would create world's largest book publisher out of two of the 'big six' companies that dominate the industry
Paperback books published by Penguin
Penguin owner Pearson and Bertelsmann, owner of Random House, have reportedly already approached competition authorities about the proposed merger. Photograph: Contemporary Collection/Alamy

The owners of Penguin and Random House are in talks about merging their publishing arms to create the world's biggest books publisher.

Pearson, which owns Penguin and the Financial Times, confirmed on Thursday that it has entered into merger discussions with Bertelsmann, the privately owned German company that owns Random House.

A merger would bring together two of the world's "big six" publishers to create a new powerhouse that would publish 25% of all books sold in the UK. The combined company's authors would include TV chef Jamie Oliver, Fifty Shades of Grey author EL James and diver Tom Daley.

A Pearson spokesman confirmed the merger talks were active, but said the companies "have not reached agreement, and there is no certainty that the discussions will lead to a transaction".

Bertelsmann, which is Europe's biggest media group and owns broadcaster RTL and X Factor producer FremantleMedia, declined to comment.

Analysts have long predicted a further round of consolidation in the book trade, which is dominated by HarperCollins, Random House, Hachette, Simon & Schuster, Macmillan and Penguin. The industry has changed rapidly in recent years following the introduction of ebook readers and mass-market selling via supermarkets.

The merger discussions come just weeks after Pearson chief executive Dame Marjorie Scardino announced her intention to stand down as after 15 years at the helm. Her exit sparked speculation that the FT could be sold – she had vowed that would only happen "over my dead body".

Analysts believe Pearson's new chief executive, John Fallon, who lacks a publishing background, could be willing to sell both the FT and Penguin, as neither division fits into Pearson's strategic vision of concentrating on becoming a dominant force in the education sector.

Lorna Tilbian, head media analyst at Numis, said it was "no surprise" the big publishers were exploring the possibility of merging. "Consolidation is the order of the day, and technology and tablet computers have given it extra momentum. They [publishers] have got to gang together to have enough clout to take on the technology giants that have transformed the industry," she said. "I can see a world where Apple, Amazon and Google become the 21st century equivalent of Time Warner, News Corp and Walt Disney, but they won't [just] be running the technology and content, but also distribution."

Tilbian said a merger would probably reduce the likelihood of an FT sell-off because a merger in which Bertelsmann takes a majority stake would provide Pearson with cash to invest in its core education business.

Speculation about the merger was first reported by German publication Manager Magazin and the FT (paywall). Manager Magazin said the publishers had already begun talks with US and EU competition authorities. It said Bertelsmann would end up with the majority of the combined company, with Pearson taking a less-than-50% stake. A source at Random House told the magazine that negotiations were "promising".

The joining together of Penguin, which has annual sales of almost £1bn, and Random House, with £1.4bn, is likely to lead to a regulatory investigation, but Tilbian pointed out that regulators allowed the music industry to be consolidated down to just three big players.

Phil Jones, editor of trade magazine the Bookseller, said: "The merger of Penguin and Random House would create a powerhouse of a consumer publisher across books, ebooks and apps. In the UK, the combined market share takes them beyond 25%, meaning any deal would likely face some kind of scrutiny from competition authorities. Even if they had to sell bits of the businesses to make it happen, it would still create by far the largest such group in the English-speaking world.

"But the deal makes sense: Amazon's market share of physical and ebooks in the UK is fast approaching 40%, with competition now only really provided by equally huge tech giants such as Apple and Google. Publishers simply need greater muscle if they're going to have a presence on these new platforms and a say in how these markets develop.

"Agents and authors will be concerned as it takes out two competitors for their content, but what they can do together means that it is now almost certainly worth whatever negatives arise out of the consolidation of these two well managed businesses. Though these kind of mergers have been predicted recently, we actually haven't seen a deal of this size in publishing for six years, but this, I think, provides the first hint of what the future shape of publishing will look like."