With speculation swirling about the possible sale of the company, the AOL Time Warner Book Group had a record year in 2002, breaking $400 million for the first time in company history and posting an operating margin of about 10%, according to sources familiar with the publisher's results. A record number of bestsellers was cited as the primary reason for the good year. In brief comments on the book group that accompanied parent company AOL Time Warner's year-end results, the company noted the success of such bestselling titles as Four Blind Mice, The Christmas Train, The Lovely Bones and The Crush.

Although AOL Time Warner announced its goal to reduce its $26.5-billion debt by $2 billion by the end of the year, it gave few details. The company did raise $800 million through the sale of its stake in Hughes Electronics, but executives did not mention what its plans are for the book unit in a conference call with analysts.

If AOL Time Warner goes ahead with its plans to sell the AOL Time Warner Book Group, it will be operating in one of the chilliest seller's markets in years. "It's a buyer's market," said longtime deal maker Martin Levin, a sentiment that was shared by several others familiar with publishing's mergers and acquisitions climate.

Ironically, the chill in the air had its beginning with last year's biggest deal—the $1.68-billion acquisition by the equity investment firms Thomas H. Lee and Bain Capital of Houghton Mifflin. The purchase price was approximately $500 million lower than what Vivendi had paid for HM just one year earlier, and was below Vivendi's initial asking price. A major reason for the low price was that no traditional publishing company was able, because of antitrust issues, or willing, because of its own financial concerns, to make a serious run at one of the country's largest educational publishers.

The situation is not much different in the trade area where AOLTWBG operates. "I haven't seen any evidence of one of the big players looking to buy another big player," said Tony Schulte, who consults on mergers and acquisitions for GSL Associates. Indeed, among the four trade publishers that are larger than AOLTWBG—Random House, Penguin, HarperCollins and Simon & Schuster—acquisitions in 2002 were limited to niche purchases by Random House and S&S.

"There isn't as much money around" as there was a year ago, Levin said, adding that some companies that did make acquisitions got burned. Corus Entertainment sold Klutz to Scholastic for $43 million last March, after paying $74 million for the company in April 2000. And in another sign of the cool seller's market, no serious bidders came forth when a $20-million children's publisher recently held an auction. Buyers "are looking at everything very carefully, and are looking for bargains," Levin said. Even smaller acquisitions have to be a perfect fit if the deal is going to be completed, Schulte said, though he added that unique properties will attract competitive bids. Most of the biggest deals in the past year were made by equity firms. In addition to the Lee/ Bain purchase of HM, the British equity firms Cinven and Candover acquired Kluwer Academic Publishers, while the investment firm Quad Ventures entered publishing with the purchase of Troll Communications. "Equity buyers are the new buyers," Levin said. "We're at the beginning of a new cycle."

So where does this leave AOLTWBG? Although the company has certain strengths, including a quality children's book group and a good position in mass market paperback, Levin believes AOL Time Warner would have to settle for a sale at about one times revenues, or about $400 million.