Two publishing giants have agreed to a merger that will create the world’s largest commercial publishing house. Random House — owned by Germany’s Bertelsmann A.G. — and Penguin — owned by the U.K.’s Pearson PLC (NYSE: PSO) — will form a new company to be called Penguin Random House, of which Bertelsmann will hold 53% and Pearson 47%.

In the press release announcing the deal the two companies said:

In reviewing the long-term trends and considerable change affecting the consumer publishing industry, Pearson and Bertelsmann both concluded that the publishing and commercial success of Penguin and Random House can best be sustained and enhanced through a partnership with another major international publishing house.

We noted last week how the publishing industry believes it is losing pricing power to the online book and e-book sellers like Amazon.com Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL) and Google Inc. (NASDAQ: GOOG).

Neither Bertelsmann nor Pearson may sell any part of their stakes in the new company for three years. Here are the details:

To protect Pearson’s interests as a minority shareholder, if Bertelsmann declines a Pearson offer to sell its entire shareholding, Pearson may require a recapitalisation by which Penguin Random House raises debt of up to 3.5x EBITDA, with a dividend distributed to shareholders in line with their ownership. In addition, from five years after completion, either partner may require an IPO of Penguin Random House.

The merger is subject to the usual regulatory reviews and is expected to close in the second half of 2013.

Paul Ausick

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