PVLF 2025

Book Publishing has a Problem with Toys 'R' Us

Learn the risks of Simon & Schuster's $1 billion debt from KKR's takeover and its implications for authors and publishing.
on Sep 11, 2023

Simon & Schuster will be saddled with $1 billion in debt as a result of a private-equity takeover. What could possibly go wrong?

The Department of Justice prevented Penguin Random House, which is owned by the German media conglomerate Bertelsmann, from acquiring Simon & Schuster earlier this year. The big five publishers currently dominate over 80% of the book market: HarperCollins, Penguin Random House, Hachette, Macmillan, and Simon & Schuster. The literary students were relieved.

Kohlberg Kravis Roberts, a private-equity group, announced its acquisition of Simon & Schuster less than a year later. Because the company does not already own a competing publication, the transaction is unlikely to spark another antitrust investigation. However, KKR, which has been known as Wall Street's "barbarians at the gate" since the 1980s, may leave Simon & Schuster staff and authors wishing for a third option other than a worldwide conglomerate or a big financial firm.

"It may be a stay of execution, but we should all be worried about how things will look at Simon & Schuster in five years," says Ellen Adler, publisher of the New Press, a charity focusing on public-interest literature.

On the surface, the Simon & Schuster takeover appears to be a typical private-equity transaction, which is exactly the problem. Private equity became the anodyne title when "leveraged buyouts" earned a bad rap, thanks in part to KKR's destruction of RJR Nabisco following a $25 billion takeover in 1988. A leveraged buyout occurs when a buyer acquires a firm with a small quantity of its own money, a greater amount of investor money, and a large amount of debt. KKR has agreed to pay $1.62 billion for Simon & Schuster, with $1 billion reportedly borrowed.

Leverage is a benefit, not a fault, in the eyes of a private equity business. Purchase a company for $100 million in cash with no debt, produce $5 million in profit every year, and it will provide a 5% return. When the same company is purchased with 60% debt, the same profit generates a 12.5 percent return in absolute terms.

Importantly, Simon & Schuster, not KKR, is responsible for repaying the debt. KKR merely increases it against the publisher's franchise value to fund the acquisition. Lenders have little recourse against KKR or its management, who are legally immune from liabilities. (Technically, KKR will not own Simon & Schuster; the owner will be a fund that KKR "advises.") According to Bloomberg, Moody's will likely award the $1 billion loan a credit rating that is five notches below investment-grade—the corporate equivalent of subprime mortgages.

Simon & Schuster would have to pay interest rates above 9% based on terms granted to similarly rated borrowers and our examination of Bloomberg data on previous transactions. On interest alone, that would cost the publisher almost $100 million, or roughly 40% of operating income in 2022. In terms of pure financials, the merger will hurt Simon & Schuster the moment it closes, regardless of what KKR does as an owner.

"Debt at these levels is simply a stressor on the company," says Eileen Appelbaum, co-director of the Centre for Economic and Policy Research and a renowned critic of private equity. "It undermines its ability to invest in technology, marketing, workers, and everything else."

Private-equity executives claim that the debt is worthwhile because they have the business acumen to make their new acquisition so profitable that they will be able to sell it for much more than they paid for it in a few years. (KKR's chairman of media, Richard Sarnoff, was a former publishing CFO.) Where will the additional value come from? KKR is promoting ambitions to grow into new kinds of publishing both domestically and internationally, among other strategies. However, the conventional private-equity strategy consists of cutting costs while increasing cash flow. This can sometimes pay off, at least for the private equity firm, because there are employees to let rid of and assets to sell.

However, the desire for pure short-term profit maximisation can be divisive. Although private equity has recently entered the book publishing market, firms have been purchasing news publications for the past decade. When they do, they typically lay off reporters and editors, reduce print editions, and spend less in the resources required for quality journalism. One of the most notable is Alden Global Capital, which is known for acquiring newspapers and then selling off their buildings to its own real-estate-flipping business. (with at least one case, this involved with a prominent newspaper paying Alden rent for office space it previously owned.) However, same actions may not be applicable to book publication. Simon & Schuster does not own the Rockefeller Centre building that carries its name. It employs approximately 1,500 people, and KKR has stated that no layoffs are anticipated.

As a result, the new owners may look for other ways to boost short-term returns. Dan Sinykin, an Emory University professor and the author of the forthcoming Big Fiction: How Conglomeration Changed the Publishing Industry and American Literature, predicts that KKR will double down on proven authors or celebrity memoirs at the expense of riskier unknown writers, similar to Hollywood's love of the sequel. Established brands serve as a low-cost solution for costly marketing.

Book publishers profit from the sale of an original product, a percentage of which is paid to authors in the form of royalties—the actual pot of gold for private equity in publishing. Although there's nothing wrong with monetizing intellectual property, Simon & Schuster authors should brace themselves for significant pressure to give the publisher a larger part of the pie. A more speculative notion is that authors' original work will be used to train AI models that will subsequently generate new monetizable content. That situation might provide KKR's Simon & Schuster with an opportunity to extract money through co-ownership of copyrights, something authors fear.

"If you train an AI model on Danielle Steel's nearly 200 books and then write a new one, somebody has to own the rights," Sinykin explains.