Mondadori and RCS Libri: An Italian Publishing Coup in the Making?

In Feature Articles by Guest Contributor

Marcello Vena is the founder of media consultancy AllBrain

Marcello Vena is the founder of media consultancy AllBrain

Marcello Vena discusses the offer Mondadori has made for RCS Libri, which would merge two of Italy’s strongest education and trade publishing groups.

Interview by Nicolas Gary, ActuaLitté

Marcello Vena is interviewed by Nicolas Gary of ActuaLitté on the recent offer Mondadori has made for RCS Libri. The acquisition would represent the merger of two of Italy’s strongest education and trade publishing groups.Negotiations are said to be ongoing, with rumors pinning Mondadori’s offer for debt-ridden RCS Libri in a range of between 150 and 120 million euros. RCS Mediagroup has granted Mondadori an exclusive evaluation period lasting until May 29th with the objective of establishing the terms and conditions of an eventual transaction, while reserving all its rights to make any consequent evaluation in this regard.

Gary: To begin with, could you give an overview of the digital activity of the two groups?

Vena: Mondadori and RCS Libri are the two largest publishing groups most committed to the digital development of the trade book business in Italy. They have followed two different and complementary approaches: Mondadori has been the investment leader at the corporate level (through alliances and acquisitions), while RCS Libri has been the leader in digital innovation.

It’s only thanks to the alliance with Mondadori, that Kobo entered the Italian market in the fall of 2012 and became a serious competitor to Amazon and Apple. The success story of Kobo in Italy is unique: they are the second strongest ebook retailer with approximately 20% of the market. In no other European country has Kobo achieved so much. The partnership with Mondadori, especially at launch, has been, foremost, the distinctive factor that contributed to this success. It has also been a positive example for others: one year later Feltrinelli’s bookstore chain also partnered Kobo too for the sale of e-readers and ebooks.

Later, in 2014, Mondadori acquired Anobii, the online book community, which is the strongest in Italy — with some 300,000 members. Anobii is currently performing a complete redesign and update and in the past four years have invested several million euros to nurture and grow the digital market in a broad sense.

RCS Libri started with digital innovation in 2010 by setting up two other publishing groups — Gems, Feltrinelli —, together with Edigita, the main digital book distribution company in Italy, which serves approximately 50% of the entire ebook market and over 130 publishers and imprints. This was just the beginning of a very intense path towards digital innovation.

RCS Libri has been the world’s first and so far only publishing group to pioneer ebook streaming on high-speed trains — with a project called ebooks aboard — starting in 2012. They also launched one of the very first digital-first imprints that published in both Italian and English — Rizzoli First. They invented Co-publishing, a third-way between traditional publishing and self-publishing. And Rizzoli was the first publisher in Europe to be truly successful with illustrated ebooks.

RCS Libri was also the first publishing group to experiment with value-added bundling of print and digital books in conjunction with both international and local retailers. Rizzoli also launched a  series of 30 immersive narrative digital books for kids with ePub3 that was selected by Apple as one of the best kid books of 2014 on iBookstore. Finally, Rizzoli launched BigJump, together with Amazon, a crowd-sourcing publishing contest for new and self-published authors in Italy. Big Jump was the forerunner of the Amazon’s KindleScout program in US.

Finally, both Mondadori and RCS Libri have heavily invested in digitizing their backlist catalogue and now own the two largest digital inventories available in the Italian trade book market. We are talking of 15.000+ ebooks, between the two groups.

Their superior commitment to digital innovation, competencies and strategies has resulted in excellent digital sales. Together Mondadori and RCS Libri are estimated to own more than 50% of the digital trade book in Italy, while their combined market share for print is slightly below 40%.


How would Italian publishing benefit from a merger?

This very much depends on how the potential deal is structured and whether that might result in a merger or not. It’s not simply a go/no-go. While Mondadori’s initial non binding offer is for all RCS Libri’s assets and activities, the final negotiated deal could be just for a part of RCS Libri’s assets.

For example it could address only the textbook business (primary and secondary schools, with a turnover of approx. Eur 90 million in 2013) and not the trade side, or just it could address a few trade publishing houses and not all of them. Obviously, it depends on the other opportunities that RCS Mediagroup has got or could build.

Among other key factors, is the fact that Mondadori is a vertically integrated book publishing group that owns one of the main bookshop chains in Italy. It’s not hard to imagine the kind of advantages for any publishing houses that are acquired. It was also strike fear in the hearts of competing publishers who might feel they would be limited adequate space in such an important book chain, especially for backlist titles. Together Mondadori and RCS Libri own more than 60% of the trade paperback market.

Let’s address this question in depth once the scope of the real deal is clear, as the impact on the Italian trade book publishing industry really depends on the actual scope. At personal level, I am still convinced that books (at least in part) are a strategic asset for RCS Mediagroup.

RCS Libri

Has the transition to a reduced VAT rate in Italy actually improved the digital market? Are readers responding positively?

The nominal VAT rate in Italy went down from 22% to 4%, the effective average VAT didn’t really change much (down from 6% to 4%). In fact as 84% (see our market study presented in NYC at DBW) of the sales were through Luxembourg (3% VAT), and Italian booksellers were obliged to stick to the 22% full VAT rate, now every bookseller applies the 4% reduced VAT rate. It’s better for everybody and for the online retail competition. A book is a book and ecommerce is ecommerce. There are no more unfair, even if lawful, VAT advantages for big international companies based in Luxembourg.

It’s too early and very hard to say if the reduced VAT will affect the market, especially because the retail prices virtually are the same as one year ago. Without the VAT reduction the prices could have increased and demand most likely decreased, but this is just educated guess. There simply isn’t enough evidence, if we want to be intellectually honest.

In fact, some leading publishing groups have reduced some prices, especially on frontlist titles, following the reduced vat regulation. But they had already raised such prices in the second part of 2014, anticipating a possible VAT increase. Therefore if we compare Jan-Feb 2015 vs Jan-Feb 2014, the prices for frontlist titles are basically the same.

The EU commission needs to change the VAT directive though and align the VATs of print books and ebooks. Currently Italy risks significant penalties, for having reduced the VAT of ebooks. It would not be acceptable to have Italian tax payers obliged to finance the EU penalties.

For many reasons, including the longstanding economic downturn in Italy, the digital book market of the first two months of 2015 is growing at a single digit rate over the same period in 2014. This is an average, of course; there are publishers and retailers that are growing much quicker. Low sales at the beginning of the year isn’t very significant though, in June we will have a more clear picture of 2015’s trends.

We’re talking about an enormous consolidation here, practically unheard of in Europe or the rest of the world. What are your thoughts on this?

What I think isn’t really important and it doesn’t really matter. What matter is: 1) the shareholders and management teams of the two potentially transacting parties (Mondadori and RCS Mediagroup) and 2) the Antitrust Authority. If the shareholders of both Mondadori and RCS Mediagroup decide it’s a good deal for them and if the Antitrust authority agrees, the deal will go through whether we like it or not. We should respect the law and the market. No one is above the law.

Italy is an independent country with its own characteristics. Alas, book lovers have been a minority in Italy forever. In 2014, 60% of Italians did not read one book. This compares with a rate of 30% of French citizens.

If we take a pragmatic stand, it is easy to realize that the political government needs to take into account that for the majority of Italians, very unfortunately, books are not the priority number one.

While France’s and Italy’s populations are pretty similar (with some 60 million people each), the book market in France is almost four times larger than Italy’s (Euro 3.9 billion vs Euros 1.1 billion). Hachette alone in France makes almost as much as the entire Italian trade book market.

So even if you consider that a Mondadori/RCS Libri merger would account for 40% of the market — a big number to be sure — the overall trade book market isn’t big in relative terms. Massive concentrations typically are riskier in bigger markets than in smaller ones.

Moreover, size matters to stay profitable in a shrinking book publishing market like the Italian one.

After all, the combined size (in term of revenue) would be not too distant from the size Mondadori alone had in 2009-2010 (trade book business, not including textbooks). Since then, the Italian trade book market suffered a significant contraction —approximately 25% — and Mondadori has lost some market share too. All in all, it’s a very complex picture with lot of pros and cons. It is really up to the Italian Antitrust authority to rule on it. Incidentally, it just approved a Joint-Venture between Messaggerie and Feltrinelli for book distribution. This joint venture is going to own over 60% of the distribution market for third-party publishers.

The Antitrust Authority has put in some provisions and special warranties to safe-guard small and midsize publishers from potential predatory behaviors of this joint venture.

Of course, authors are in their rights to fear the concentration as risky to them and their independence.

However, a publisher without authors does not make any sense at all. Everybody knows it. Authors are the first and foremost asset of the top trade publishers. I would be very surprised to see Mondadori (or any other buyer) ignore the role of authors; it would risk purchasing an empty box.

Mondadori is too savvy and keen on the core book publishing business to ignore it. Still, 60% of the market would be in the hands of other important publishing groups, such as Gems, Giunti, Feltrinelli, and many small and mid sized publishers. They would just love to have the privilege of publishing RCS Libri’s authors…

Let me take this opportunity to look at the bigger picture.

If RCS Mediagroup really wanted to get out of the book business entirely, it would probably be better off selling the publishing houses to different players piece-by-piece. They would likely be able to collect much more money and to repay a higher part of the outstanding debt.

The entirety of its school and textbook business could go with one buyer, while the trade book business could be split among many buyers. And, as an upside, there would be less concern for the antitrust regulation. Such split sales would benefit more stakeholders in book industry than a one-shot sale to one single player.

One of the main drawbacks of such strategy is timing. The current RCS board of directors, including the CEO, is at the end of its three year term at the end of April and it does not have the time to duly pursue it.

This is to Mondadori’s advantage. We don’t know what Mondadori really offered — although the rumors say something between 120 and 150 million euros — but we should guess that made a low ball offer. “Buy low” is the most natural strategy in such cases. Mondadori’s management is very experienced and smart. There is no reason to overpay for RCS Libri now: there are no other public offers and the RCS management team has too little time to consider anything else. If they refuse to sell, Mondadori can still bid later when the new boards of directors is in place.

There might be other options for RCS to serve its own debt and avoid or limit the sale of its book business?

RCS might consider selling other assets (they just sold their participation in IGP Decaux for 18 million euros and might do the same with their stake in Finelco (owner of three key national radio broadcasters), Digicast (TV business) or sell some business assets Spain (RCS owns Unidad Editorial).

The sale of assets is not, of course, the only path. In theory, increasing capital investment could be an option — although not easy — and debt refinancing could be another one. They know it all and well. Frankly, they don’t need us to tell them what to do.

We can expect that any binding decision will most likely be taken by the new board of directors coming into power at the end of April. In fact, the current board recently went so far as to authorize a not binding due diligence to let the next board of directors decide what to do, including developing a completely new business plan.

Does this project resemble the Penguin-Random House merger ?

At this point in time, not at all. Even if the full deal went through it’s a completely different story for several reasons. Let me list a few of them:

  1. This would not be a merger but rather an acquisition. The buyer would get full ownership of the assets. PRH is co-owned by the shareholders of Random House (Bertelsmann) and Penguin (Pearson). Mondadori would own 100% and RCS nothing. This implies a totally different governance and corporate politics.
  2. Mondadori and RCS trade book business are at national level only (books in Italian languages), without any significant global perspective to exploit in the short term. It’s very different from the international expansion envisioned by PRH for books in the English language.
  3. This acquisition is not only meant for the trade business but also the the school text/book business where Mondadori and RCS combined own about 25% of the market. PRH was only about trade book. Pearson continues to be the largest book publisher for education ebooks.

This deal, at this point, appears not only strategic but also opportunistic. Mondadori is, very likely, trying to buy low something that RCS Mediagroup would not probably consider to sell at bulk if it had not financial and timing problems. If you owned/managed Mondadori, wouldn’t you try and do the same?

In the meanwhile RCS Mediagroup is pursuing the divestment of non-core assets. On March 6th it has announced it has initiated exclusive negotiations with a leading financial services firm regarding the possible sale of the 44.45% shareholding in the radio business Finelco. The more money RCS can collect by divesting non-core asset, the less money it will need to serve its debt obligation and therefore it might not need to sell the entire RCS Libri, perhaps just a part thereof. This is just a pure strategic speculation at this point. No info are available on such other scenarios to date.

Translation assistance was offered by Olivia Snaije.

Disclaimer: Marcello Vena does not own any share of either RCS Mediagroup or Mondadori. He does not have either company as client. All the information used herein is publicly available. While Marcello Vena has made every attempt to ensure that the information contained in this document has been obtained from reliable sources, he is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in the article is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. To the fullest extent possible, Marcello Vena disclaims any liability arising out of the use (or non-use) of this document and its contents, including any action or decision taken as a result of such use (or non-use). All copyright and other proprietary rights in this document remain the property of Marcello Vena and any rights not expressly granted in these terms are reserved.

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