business news in context, analysis with attitude

by Kevin Coupe

The news was reported yesterday afternoon - the US Department of Justice had prevailed in its efforts to block a $2.18 billion merger of Penguin Random House and Simon & Schuster, two of the world's top five publishers.

My first thought:  What does this tell us about potential roadblocks to the $24.6 billion proposed acquisition by number two grocer Kroger of number four grocer Albertsons?

The deals are not the same by any means.  First of all, the Kroger-Albertsons merger has a value that is 10 times bigger.  And there may be ways for the supermarket chains to assuage the Federal Trade Commission (FTC) and Justice Department and convince them to let their deal go through.  (For example, the grocers can get divest stores to address competitiveness issues.  I'm pretty sure that Penguin and Simon & Schuster wouldn't have sold off their relationships with Stephen King and John Grisham to Hachette to make the deal work.)

But there are some commonalities - most specifically, and most likely, in the approach taken by regulators in assessing them.

Here's how the New York Times wrote about the judge's decision in the publishing case:

"A federal judge blocked on Monday a bid by Penguin Random House, the biggest book publisher in the United States, to buy one of its main rivals, Simon & Schuster, in a significant victory for the Biden administration, which is trying to expand the boundaries of antitrust enforcement.

"The judge, Florence Y. Pan, who heard the case in the United States District Court for the District of Columbia, said in an order that the Justice Department had demonstrated that the merger might 'substantially' harm competition in the market for U.S. publishing rights to anticipated top-selling books … Penguin Random House has about 100 imprints that collectively publish more than 2,000 new titles a year. Through the merger, it would have gained roughly another 50 imprints from Simon & Schuster."

From the Wall Street Journal:

"In blocking further publishing-industry consolidation, the decision provided a needed boost to Biden-era antitrust enforcers at the Justice Department after they lost a string of recent merger challenges in court.

"German media company Bertelsmann SE, whose holdings include Penguin Random House, agreed to the Simon & Schuster acquisition in November 2020.

"Assistant Attorney General Jonathan Kanter, the Justice Department’s top antitrust official, said the merger would have decreased author compensation and 'diminished the breadth, depth and diversity of our stories and ideas.'

"Mr. Kanter added: 'The decision is also a victory for workers more broadly. It reaffirms that the antitrust laws protect competition for the acquisition of goods and services from workers'."

The publishers have said they plan to appeal the ruling, so it is not over yet.

One difference commonality between the two deals is that they both focus on the suggestion that the merged companies would be better able to compete with outside entities.  In the case of Kroger and Albertsons, those entities are Walmart and Amazon (which has an outsized influence on the marketplace despite the fact that its food sales are far smaller … for the moment).  In the case of the two publishers, part of the goal is to have more leverage in dealing with Amazon.

Here's how New York Times columnist Shira Ovide characterized

 it a couple of months ago:

"The government's rationale is pretty simple:  the purchase would effectively reduce competition in the book business, hurting authors who will have fewer places to peddle their wares and potentially hurting consumers by raising prices … The elephant in the room is Amazon. Book publishers want to become bigger and stronger partly to have more leverage over Amazon, by far the largest seller of books in the United States. One version of Penguin Random House’s strategy boils down to this: Our book publishing monopoly is the best defense against Amazon’s book selling monopoly."

The Times story yesterday pointed out that "industry luminaries, among them powerful literary agents and best-selling authors, testified. Executives from Penguin Random House and Simon & Schuster spoke in support of the deal, arguing that the merger would benefit writers, because combining the publishing houses would lead to cost savings, allowing the company to spend more on books."

But the opposite argument is that the consolidation of power also would hurt smaller publishers and beginning writers - there would be so much focus on big writers and best sellers that anyone not meeting that standard would be lost in the shuffle.   (Ironically, Stephen King - who is published by Simon & Schuster imprint Scribner - testified to this effect in court, going against his own publisher and, arguably, his own financial interests.)

When it comes time for the FTC and the Justice Department to evaluate the Kroger-Albertsons deal, the metrics may be different, but in some ways, the stakes will be much greater.  This isn't just about books and publishers and highly compensated authors, but rather about retail entities that serve as the backbones of their communities and play a vital role in the nation's food supply.

As Axios puts it, Kroger and Albertsons may be facing regulatory headwinds, since the publishing case "is seen as a precedent-setter for mergers and acquisitions at large under the Biden administration."

The announcement of the Penguin Random House and Simon & Schuster ruling was an Eye-Opener.  Hard to imagine that the execs at Kroger and Albertsons saw it as good news.