Initial Bids In for AOL Time Warner Book Group

Between five and 10 preliminary bids to acquire the AOL Time Warner Book Group were submitted to Merrill Lynch by last Wednesday's opening-round deadline. Sources familiar with the bidding process said they were not surprised by the number of initial offers, but added, "It's not clear how many will be standing at the end."

Among the companies reported to have made a bid are Random House, Penguin and Frank Pearl, the financier who is backing the Perseus Group. WH Smith confirmed that it has teamed with the equity firm Cinven to make a bid. Several investment houses also made preliminary offers. "There are a number of players looking for a bargain," a source said. HarperCollins, which had been rumored to be interested in AOLTWBG, said the day before bids were due that it would not make an offer.

The absence of HC reinforced the perception that AOL Time Warner is not likely to get more than $400 million for the book unit. Although the book group had record sales of just over $400 million in 2002, sources predicted the soft U.S. economy and the softer outlook for trade book publishing will combine to keep the purchase price below the book group's revenue—the traditional yardstick in measuring the value of a trade book publisher.

Although AOLTW is not likely to get its original asking price, there is a growing consensus among industry dealmakers that now that AOLTWBG is officially in play, it would be difficult to pull the company off the market without damaging its future prospects. Industry observers noted that the decision to withdraw AOLTWBG from the block would be similar to Hearst Corporation's decision not to sell its Morrow/Avon group in 1994 after a protracted and messy sales process. Hearst eventually sold the company to HarperCollins in mid-1999 for an estimated $180 million. Hearst had been looking to sell Morrow/ Avon for more than $200 million in 1994, although it never received an offer close to that figure. AOLTWBG, however, has so far avoided the mass talent defections that affected the Hearst Book Group during and after the aborted sales process, so it is still possible for the book group to move forward if its parent company decides to hold on to it.