NEW YORK (The Deal) -- Although Hachette Book Group Inc., Perseus Books Group and Ingram Content Group Inc. have called off their three-way deal, the termination doesn't necessarily spell an end to dealmaking for the three media houses.
About seven weeks after the trio announced they had entered into an agreement in which Hachette would buy Perseus then sell Perseus' client services unit to Ingram, Perseus chief executive David Steinberger wrote in a Thursday, Aug. 7, e-mail to employees that "the planned transaction involving [Perseus], Hachette and Ingram is not moving forward." He added that "despite much effort from all three parties, [they] could not reach agreement on everything necessary to close the transaction."
Officials with Hachette and Ingram also confirmed the proposed transaction had ended, but they declined further comment.
"I don't think there was a problem on the Hachette-Perseus side of the deal," said David Worlock, co-chairman of Leadership Programs at media industry-focused research firm Outsell Inc.
When Ingram began examining the deal, it likely "began to realize that this would change the market share of Ingram sufficiently to evoke some sort of regulatory reference," he said. It then may have suggested placing a clause in the agreement asking for a form of compensation if the deal did not win regulatory approval, according to Worlock.
"At that point, it probably fell down," he said.
Worlock noted a Hachette-Perseus deal would have received a green light, adding it would have been "much more sensible" for Hachette to purchase Perseus as a whole and then sell the distribution side to whomever wanted it.
"I suspect the guys in Paris said, 'We will give you the money to buy the publishing side of Perseus, but we don't want to give you the money to buy all of Perseus,' " Worlock said of Hachette parent Hachette Livre, a division of Lagardere SCA. Hachette and Lagardere could have been worried about not finding a buyer for the distribution division, he said.
Perseus is owned by private equity firm Perseus LLC. Ingram is a unit of Ingram Industries Inc.
"It seemed to me a deal that made sense to everybody," said Mike Shatzkin, chief executive of publishing industry-focused consulting firm Idea Logical Co., adding that Hachette and Ingram would have gained value through the acquisition and the Pearl family behind Perseus was looking for an exit.
While Shatzkin doesn't see equivalent deals "to be sought for Hachette or Ingram," he said, "Somebody will eventually pursue Perseus."
In fact, if Perseus' publishing piece hits the block, it could go to either a larger peer or an independent publisher looking to grow quickly, Outsell's Worlock said. Publishing houses such as Macmillan Publishers Ltd. could be a good fit, he noted, highlighting it is the only one among the Big Four -- a group that also includes Hachette, Penguin Random House and HarperCollins Publishers LLC -- that hasn't carried out a deal recently. Macmillan is a privately held company owned by Germany-based Verlagsgruppe Georg von Holtzbrinck GMbH.
Worlock explained Perseus' distribution segment could go to another distributor smaller than Ingram, which dominates the space. A content management business could also be interested, he said, pointing to Royal Swets & Zeitlinger Holding NV as a potential suitor.
Hachette, which is known for its popular-fiction titles, probably will continue looking for ways to expand its nonfiction backlist, Worlock said.
"However big you are, the only thing you can do margin-wise is to grow bigger. Everybody wants to grow bigger," Worlock said of fiction publishers, pointing to HarperCollins' recent acquisition of Harlequin Enterprises Ltd.
He noted W.W. Norton & Co. is among nonfiction publishing houses that could emerge as an appealing acquisition target for Hachette because it would give the latter "the ability to continue sales over long periods of time."
As for Ingram, the publishing services provider is already loaded on the distribution side, explained Thomas Woll, president of Cross River Publishing Consultants. Still, it could look to pick up distribution from some of the larger publishers. For instance, HarperCollins turned over its distribution business in the U.S. to R.R. Donnelley & Sons Co. back in 2012, and Donnelley now provides all of the back-end business to the company. Companies such as Simon & Schuster Inc. ultimately could go to Ingram for a similar service.
Woll, however, did not rule out the possibility of Hachette and Perseus revisiting the deal, adding they could pursue some other format: "It would mean a total reorganization within the Perseus family, but stranger things have happened," he added.
While the publishing industry as a whole has been consolidating, players in the mid-upper level have been driving most of the activity, while smaller companies have not been as active, said Jeffrey Gold, president of boutique investment bank Goldmark Advisers Inc.
"I'm surprised that there haven't been other large transactions since Random House-Penguin closed," he said, adding that consolidation is likely to continue at the top level, which could eventually become a top-two players' market.
Still, he said there are many companies in the second tier of the industry that could be attractive targets. For instance, Barnes & Noble's (BKS) Sterling Publishing Co. could emerge as a potential takeover target, but a prospective buyer would probably have to score a specific agreement with the retailer before sealing a deal since Barnes & Noble is a big purchaser of Sterling books.