PW: Sale of S&S Shuffles Publishing Powerhouses

Last week's deal involving Simon &Schuster's educational, reference, business and professional units will make Pearson the largest U.S. educational publisher and one of the world's largest publishers, while also introducing a new player -- the investment firm, Hicks, Muse, Tate &Furst -- into the book publishing field. Under terms of the deal, which is expected to close in this year's third quarter, Pearson will pay a total of $4.6 billion for the S&S assets, and then will immediately sell the reference, business and professional groups to Hicks, Muse for $1 billion, leaving Pearson with a bill of $3.6 billion for the school, higher education and international groups. Total sales of the S&S assets acquired were $1.9 billion in 1997, with operating income of $261 million.

The addition of the S&S education groups to Pearson's Addison Wesley Longman group will form an educational publisher boasting worldwide sales of more than $2 billion, and will vault Pearson into the top spot among American educational publishers, a place formerly held by S&S. The deal will make Pearson the largest publisher for both the elhi and college markets. Pearson said sales of the S&S units it retained totaled $1.4 billion in 1997, with operating profit of $210 million. Analysts described the purchase price as full but fair, representing a multiple of about 2.5 times sales. One investment banker noted that the acquisition makes Pearson a serious player in the educational publishing market, whereas in the past the company was struggling. Indeed, in 1997 AWL sales were disappointing, increasing less than 2%, while many educational publishers enjoyed double-digit gains.

Peter Jovanovich, CEO of Addison Wesley Longman, will be put in charge of the combined operations. S&S assets include some of the best-known names in the educational industry, such as Silver Burdett Ginn, Allyn &Bacon, Prentice Hall, Modern Curriculum Press and Globe Fearon. The purchase also moves Pearson's education group much further down the technology road through such companies as Educational Management Group and Computer Curriculum Corp. In addition to owning technology-oriented companies, nearly all of S&S's education copyrights are in digital form and the college unit has one of the largest custom publishing operations in the industry. The acquisition will also bolster Pearson's international presence through the purchase of S&S operations in Asia, Latin America, Australia and Europe. Jovanovich said Pearson intends to keep the individual educational brand names, but will need to find an umbrella name to cover all the different groups.

Although Jovanovich told PW it was premature to talk about what changes may lie ahead for the combined companies, Pearson has promised to find $130 million of savings by 2000 by integrating such functions as distribution, production, central management and IT. Management for the new education group will come from both the AWL and S&S ranks. Some integration will also involve Pearson's consumer unit, Penguin Putnam. Jovanovich noted that AWL and Penguin were already working toward developing some shared back-office services, and that Pearson will continue down that path. The combination of Pearson's existing book operations, (which had sales of $1.8 billion in 1997), with that of S&S will form a company with total book sales topping $3 billion.

The divisions acquired by Hicks Muse -- the reference group headed by Scott Flanders, and the business and professional group led by Martin Maleska -- had worldwide sales of nearly $600 million and EBITDA of $80 million last year. The reference group operates under the Macmillan Publishing USA name and includes the computer book operation and brand names in cooking (Betty Crocker), travel (Frommer's) and reference (Webster's New World Dictionary). The business and professional group includes such publishing companies as Jossey-Bass, New York Institute of Finance and Appleton &Lange.

Based in Dallas, Hicks Muse has a reputation as a "buy-and-build" company that acquires core companies and then grows the business through internal expansion and acquisitions. The S&S purchase is Hicks Muse's first acquisition in the book publishing field, and Michael Levitt, the Hicks partner who headed up the company's purchase, has said he intends to seek further acquisitions in the book business. Hicks Muse is also known for looking for companies with solid management, and a spokesperson said Hicks Muse thinks the reference and business and professional groups have strong management teams. Hicks Muse is also considering what name the company will be known by, the spokesperson added.

In his letter to employees announcing the sale, S&S president Jon Newcomb said that "while it was my preference for our businesses to join a single organization, it is gratifying that each of the winning organizations appear clearly committed to growing the assets they have obtained."