KKR plans to write a new story on books, but the ending is a little fuzzy. The buyout shop agreed on Monday to buy Simon & Schuster from media conglomerate Paramount Global (PARA) for $1.6 billion after trustbusters tore up an earlier sale to Penguin Random House.

Freepik

Even with modest growth, a healthy return for the new owner looks feasible. It’ll just take some imagination to exit.

The private equity firm aims to expand the publisher behind horror writer Stephen King and presidential historian Doris Kearns Goodwin. International sales account for less than a fifth of the top line and there may be additional opportunities to do more with audio books and Simon & Schuster’s intellectual property. It’s safe to say that Richard Sarnoff, KKR’s media chairman and a longtime Random House executive, will have ideas.

It also stands to reason that Simon & Schuster could do better independently given that Paramount has been distracted by streaming-video wars. The price tag seems reasonable, too. KKR is paying about 8 times estimated 2023 EBITDA, according to a person familiar with the figures. Penguin Random House was going to pay 14 times 2021 EBITDA, but also probably would have been able to extract more cost savings from the combination.

Assume Simon & Schuster’s sales grow around 5% over each of the next four years, in line with what consulting firm PwC projects for the industry. Under that scenario, revenue would jump to some $1.4 billion by 2028. If KKR can boost the EBITDA margin to 21% from 18% over the same span while reinvesting about 2% of revenue each year and paying down debt, the implied annualized return would be about 25%, according to Breakingviews calculations. The math is based on KKR putting debt equal to 5 times EBITDA, or about $1 billion, on Simon & Schuster’s balance sheet and selling the company at the same multiple it is paying.

Unless something in the calculus changes dramatically, however, it probably will be hard to offload Simon & Schuster to a rival, considering the position taken by competition authorities against consolidation. Far smaller Bloomsbury Publishing and children’s book specialist Scholastic are both publicly traded, but whether fund managers will back an additional stand-alone publisher is questionable. And the idea of a different media company adding Simon & Schuster to its sprawl sounds dubious. It leaves KKR’s final chapter shrouded in mystery.

Context News

Private equity firm KKR said on Aug. 7 it would buy book publisher Simon & Schuster from Paramount Global for $1.6 billion. The media conglomerate originally agreed in November 2020 to sell the business to larger rival Penguin Random House for $2.2 billion. A U.S. federal judge blocked the deal on Oct. 31, 2022, after the U.S. Department of Justice sued, alleging it would lead to fewer books and lower payments to authors.

More By This Author:

STOXX 600 Earnings Outlook 23Q2 - Tuesday, Aug. 8
S&P 500 Earnings Dashboard 23Q2 - Tuesday, Aug. 8
PayPal Pays Price For Prolonged CEO Hunt