KKR’s early travails were chronicled in a best-selling book, Barbarians at the Gate, which details the company’s $30bn takeover of RJR Nabisco and the pulverising tactics that earned it a reputation as a Wall Street wrecking ball.
Now, the barbarians are weighing entering the book business itself. Storied book publisher Simon & Schuster is back on the market, after US regulators blocked a previously agreed merger with rival Penguin Random House, arguing it would “result in substantial harm” to authors.
A renewed auction is heating up and KKR is among the bidders for Simon & Schuster, the 99-year-old publisher that is home to best-selling writers such as Colleen Hoover and Stephen King.
People close to the process say that there are five bidders, including KKR, the Rupert Murdoch-controlled HarperCollins, and the investor Richard Hurowitz who is backed by Abu Dhabi’s sovereign wealth fund. There is one more large private equity fund in the mix, said a person familiar with the matter. Prices are nearing $2bn. That compares with a $2.2bn valuation in the failed PRH deal in 2020 but the broader financial backdrop has darkened considerably.
The second round of bids are due in mid-July, and S&S owner Paramount hopes to strike a deal by the end of the summer. Even after all the regulatory headaches and a weeks-long legal trial last year, Paramount has not wavered in its desire to get rid of S&S.
S&S is a well-run business but Paramount is competing with Netflix and HBO in the expensive “streaming wars”. As Paramount chief executive Bob Bakish put it: S&S, the publisher of F Scott Fitzgerald and Edith Wharton, is “not video-based” and therefore not needed.
This time round, Paramount will be looking closely at regulatory risk in choosing who to sell to, according to people involved in the process. The justice department viewed the proposed merger of PRH with S&S as anti-competitive, whittling the industry’s big-five publishing houses to four. So a financial buyer will have advantages in the new auction. Is such an acquirer worse than a mega-publisher? Some industry figures believe so.
“Without a doubt this is worse,” said a senior executive at a major publisher. “KKR would bleed it for cash, not reinvest in the business, and in five to 10 years the rest of us, guys like me, would be buying parts of the carcass.”
Douglas Preston, a best-selling author and previous president of The Authors Guild, said that financial groups were “profoundly ignorant of publishing”. “One of the things they might not understand is that the return on equity in book publishing has always been historically very low,” he noted.
However, Morgan Entrekin, president of Grove Atlantic, an independent publisher, said his preference would probably be that Simon & Schuster remained separate from one of the other big four publishers. “It adds diversity in the industry to have more significant players,” he said.
Publishing is not a growth sector, but it does deliver reliable profits. S&S lifted operating income 16 per cent to $248mn last year, while raising revenues 10 per cent to north of $1.1bn — amounting to what chief executive Jonathan Karp described as an “extraordinary, stratospheric year”. This is in part due to the wild success of Hoover, whose novels have garnered a following on TikTok.
Legacy media companies are usually valued anywhere from five times to 10 times earnings before interest, tax, depreciation and amortisation. Paramount does not break out ebitda for S&S. But at a price tag of $2bn, S&S would be valued at more than 8 times last year’s operating income. That is not a slam dunk of an investment case.
The strategies of private equity houses have moved on from the Nabisco days when buyout groups were synonymous with asset stripping. Defenders of KKR point to successful investments in media companies such as BMG and Epic Games. They mention how Richard Sarnoff, who leads KKR’s media unit, was previously an executive at Random House. This is cold comfort for many creative-minded people in publishing.
“They care about making more money. What kind of risks are they going to take on interesting books? It’s not just numbers and predicting. It’s not just ‘oh, everybody loves golf, let’s publish books about golf’,” said Gail Hochman, a veteran New York literary agent. “It’s this creative instinct. That’s the publishing business.”
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