PRH deal for S&S won't affect UK competition, watchdog says

The UK’s Competition & Markets Authority (CMA) has revealed it cleared Penguin Random House owner Bertelsmann's acquisition of Simon & Schuster last month because the two publishers are not viewed as close competitors as far as the UK is concerned.

In its full decision, published on 4th June, the CMA said it does not believe the merger would result in a substantial lessening of competition in the UK market. It said, while PRH is the largest publisher of trade books in the UK with a 20%-30% share of supply according to Nielsen data, the increment from the merger “will be small” at approximately 0%-5% “across all the segments where the parties compete”.

The report added: “The CMA believes that the parties do not compete particularly closely with each other and that the merged entity will face sufficient remaining constraints post-merger including from the three largest competing publishers in the UK (Hachette, HarperCollins and Pan Macmillan), as well as from a large number of smaller publishers (several of which are comparable to S&S in size).”

The report noted that there were several competing bidders for S&S and that without the merger “S&S would no longer have continued to operate as an independent competitor” and would have been acquired by someone else. The name of the organisations that might have acquired S&S have been redacted, although HarperCollins owner News Corp had previously expressed an interest in the acquisition and was later critical of the PRH deal.

Because both PRH and S&S compete in the publishing and sale of trade books, the CMA assessed whether the merger may give rise to “unilateral” effects. Unilateral effects can arise when one firm merges with a competitor that previously provided a competitive constraint, allowing the merged firm profitably to raise prices or degrade other aspects such as quality, range, service and innovation. These effects are more likely when the merging parties are close competitors.

The CMA looked at shares of supply for the sale of trade books in the UK, data on the volume of UK bestsellers sold by the parties and other publishers, third-party views on the best alternatives available to customers, and the parties’ internal documents.

It found that the only segment where PRH’s share exceeds 30% is in fiction, where its share is approximately 30%-40%. It said that in all segments, the merger will result in “only a small increment to PRH’s share, in the range of 0%-5%” noting the combined shares will generally be below 30%.

Three large publishers will remain in the UK post-merger “with a substantially larger share than S&S”. These include Hachette, with a share of 10%-20% in most segments, HarperCollins, with a share of 5%-15%, and Pan Macmillan, with a 5%-10% share.

The CMA noted there also several smaller publishers with shares in the range of 1%-5% — and therefore comparable to S&S — across multiple segments, such as Bloomsbury, Bonnier, Oxford University Press, Scholastic, Amazon, Usborne and Faber. Likewise, there are a number of publishers all with shares of less than 1% each. The CMA said “a substantial combined share of supply in most segments (30%-60%) will remain in the UK post-merger" and that the merged entity “will continue to face competition from a wide range of publishers post-merger”.

When looking at the numbers of top 100 annual UK bestsellers by value and volume by PRH and S&S between 2017 and 2019, the CMA concluded “the data did not suggest that S&S is a particularly significant competitor in the UK with regard to bestsellers, or that its comparatively stronger position in the United States has helped it to secure rights to bestselling books in the UK".

The report said several third parties had expressed concern to the CMA that PRH “as the largest UK publisher, already holds a strong position in the UK, which would be strengthened by the merger”. Those parties raised concerns it could result in higher prices, lower service quality or reduced choice for customers. Some also raised concerns that it could lead to reduced advances or worse terms and conditions for authors.

However, the CMA said that, overall, feedback from the parties’ customers and trade bodies “indicates that PRH and S&S are not particularly close competitors” and “a significant number of other publishers will remain post-merger to constrain the merged entity”.

Internal documents also did not suggest that PRH and S&S view each other as particularly close competitors in the UK. The CMA said “except for documents relating to the merger, PRH’s documents do not focus on S&S in the UK in any significant way” and strategy presentations for its board only refer to S&S alongside other publishers in shares of supply tables and charts built using Nielsen data. This contrasts to PRH’s assessment of other publishers, which are conducted in more detail.

Penguin Random House declined to comment on the full text. Greeting the clearance last month, it said: “We’re pleased that the Competition & Markets Authority has cleared Penguin Random House’s acquisition of Simon & Schuster in the UK. The process in the US is ongoing and we are working constructively with the authorities there.”

The deal is still facing further scrutiny by the US Department of Justice. The DoJ was urged by American writers' groups to intervene and stepped up its own review, making a “second request” for information. Second requests often involve issuing a subpoena to obtain market share information and documents on markets and the transaction's competitive implications.