Private equity may buy the book

NEW YORK (CNNMoney.com) -- These should be happy times for book publishers.

There are new novels from popular authors like Stephen King, Michael Crichton and James Patterson, not to mention a Hannibal Lecter prequel from Thomas Harris. Jonathan Grisham has a non-fiction book out that has been near the top of the best-seller lists for the past few weeks. The big guns are all in stores for the holidays.

Yet, book publishing remains a tough business with little or no growth to be found. CBS (Charts), which owns publisher Simon & Schuster, reported that sales from its book division rose only 2 percent in the third quarter while operating profits were down 13 percent. For the first three quarters of 2006, sales were up only 5 percent and operating profits were flat.

News Corp (Charts)., the parent company of publisher HarperCollins, is also struggling. In the company's fiscal first quarter, which ended in September, sales fell 6 percent and operating income decreased 21 percent from the same period last year.

Pearson (Charts), the British media firm which owns the Penguin book publisher, reported that Penguin's revenue increased just 2 percent in the first nine months of this year.

And children's book publisher, Scholastic (Charts), which sells the wildly popular "Harry Potter" franchise of novels in the U.S., also is stuck in a slow-growth mode. Scholastic will report its fiscal second quarter results on Tuesday and analysts expect sales to increase less than 1 percent with profit growth forecast at 7.5 percent.

Due to the industry's sluggish growth prospects, one media firm, Time Warner (Charts), decided to sell its book division earlier this year to French media company Lagardere. (Time Warner also owns CNNMoney.com) Will other media giants decide to follow Time Warner's lead?

One investment banker said it's likely that other firms are at least considering sales. "A lot of times when one media company takes the lead like that others come to similar conclusions," said Reed Phillips, managing partner with DeSilva & Phillips, a media investment bank based in New York.

Private equity firms, which have been busy scooping up other media companies (Univision, Clear Channel and Reader's Digest to name a few), could be attracted to the steady streams of cash that book publishers generate.

"If you look at the big media companies, they are all going through a reevaluation of the conglomerate model. It may not make as much sense to own everything," said Glover Lawrence, co-founder of McNamee Lawrence & Co, an investment bank based in Boston. "Book publishers are generally very cash flow predictable so they make ideal targets for private equity buyers."

In fact, a consortium of buyout firms bought textbook publisher Houghton Mifflin in 2002 from Vivendi. The private equity group, which included Bain Capital, Thomas H. Lee Partners and Blackstone Group, agreed to sell Houghton Mifflin last month to Irish educational software firm Riverdeep.

And private equity firm InterMedia partners, which is run by media and cable TV veteran Leo Hindery, agreed to take Thomas Nelson, a publisher of Bibles and other religious-themed books, private earlier this year as well.

For CBS, selling Simon & Schuster could make a lot of sense and would not come as a huge surprise. The company has already sold other underperforming assets this year, most notably its Paramount Parks division and several radio stations in small markets.

To that end, David Joyce, an analyst with Miller Tabak + Co. said he heard that Simon & Schuster had been on the shopping block previously. He added that he doesn't think a sale is likely in the near future but it couldn't be ruled out if it continues to post anemic growth.

"The growth rates of smaller assets could affect the overall growth rates at media firms," he said. "So a sale could be a possibility. All sorts of ideas are being bandied about and there is the trend of Time Warner getting out of publishing."

News Corp., though, has not been a company that has been involved in many asset sales so a sale of HarperCollins is seen as far less likely. To be sure, the HarperCollins division has given News Corp. a bit of unwanted negative publicity lately due to the controversy surrounding the O.J. Simpson novel that Harper Collins had intended to publish.

News Corp. later pulled the plug on the book, which was being billed as a fictitious account of the Nicole Brown Simpson and Ron Goldman murders, as well as a TV special that it planned to air on News Corp.-owned Fox to promote it. And on Friday, HarperCollins announced that it had fired Judith Regan, the publisher who was responsible for the O.J. book.

Still, Phillips said that, despite the O.J. fiasco, he did not think News Corp. would be looking to unload HarperCollins.

"Now that they've dismissed Regan, their view probably would be problem solved. I don't think they would necessarily believe it would now be time to sell HarperCollins," he said.

But Lawrence said he wouldn't rule out a deal since all large media companies are doing everything they can to increase their presence in the more lucrative online world. So selling off book publishing could raise cash that media firms could use to invest more aggressively in digital media, he said.

Another analyst added that Wall Street would likely applaud a sale of Simon & Schuster or HarperCollins.

"Both companies would be fine without books and getting rid of those divisions could give a boost to their growth rates. Separating it out could also be beneficial to shareholders since these divisions are not getting valued fairly by the market," said Andy Baker, an analyst with Cathay Financial.

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Analysts quoted in this story do no own shares of the companies mentioned and their firms have no investment banking ties to the companies.

The reporter of this story owns shares of Time Warner through his company's 401(k) plan. The reporter's wife works for a division of Pearson and owns shares of that company.