Earlier this year, the Department of Justice blocked Penguin Random House, owned by the German media giant Bertelsmann, from acquiring Simon & Schuster. The big five publishers—HarperCollins, Penguin Random House, Hachette, Macmillan, and Simon & Schuster—already control about 80 percent of the book market. The literary class was relieved.
Less than a year later, the private-equity firm Kohlberg Kravis Roberts announced that it would buy Simon & Schuster. Because the firm doesn’t already own a competing publisher, the deal is unlikely to trigger another antitrust probe. But KKR, infamous as Wall Street’s “barbarians at the gate” since the 1980s, may leave Simon & Schuster employees and authors yearning for a third choice beyond a multinational conglomerate or a powerful 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, the publisher at the New Press, a nonprofit focused on public-interest books.
On its face, the Simon & Schuster acquisition appears to be a standard private-equity deal, which is precisely the problem. Private equity is the anodyne label adopted after “leveraged buyouts” got a bad name, in part thanks to KKR’s ravaging of RJR Nabisco after a $25 billion takeover in 1988. In a leveraged buyout, the buyer takes over a company with a small amount of its own money, a larger amount of investors’ money, and a whole lot of debt. KKR agreed to pay $1.62 billion for Simon & Schuster, of which $1 billion will reportedly be borrowed money.
From the perspective of the private-equity firm, leverage is a feature, not a bug. Purchase a company for $100 million in cash with no debt, make $5 million in profit annually, and it will deliver a return of 5 percent. Buy the same company using 60 percent debt, and that same profit in absolute terms yields a 12.5 percent return.
Crucially, Simon & Schuster, not KKR, is responsible for repaying the debt. KKR simply raises it, against the publisher’s franchise value, to fund the acquisition. Lenders have no recourse to KKR or its executives, who are legally shielded from liability. (Technically, KKR won’t own Simon & Schuster; the owner will be a fund that KKR “advises.”) Moody’s will likely assign the $1 billion debt a credit rating about five levels below investment-grade, according to Bloomberg—the corporate equivalent of subprime mortgages.
Based on terms granted to similarly rated borrowers, and on our analysis of Bloomberg data on recent transactions, Simon & Schuster would have to pay interest rates above 9 percent. That would cost the publisher nearly $100 million, about 40 percent of operating income in 2022, on interest alone. In raw financial terms, the transaction will weaken Simon & Schuster the moment it closes, never mind what KKR does as an owner. (Both KKR and Simon & Schuster declined to comment for this article.)
“Debt up at these levels is quite simply a stressor on the company,” says Eileen Appelbaum, a prominent critic of private equity and a co-director of the Center for Economic and Policy Research. “It undermines its ability to invest in technology, marketing, workers, and everything else.”
Private-equity executives argue that the debt is worth it: They have the business savvy to make their new acquisition so much more profitable that they’ll be able to sell it in a few years for much more than they paid for it. (Richard Sarnoff, the chairman of media at KKR, was a longtime publishing CFO.) Where will that extra value come from? KKR is touting plans to expand into new genres of publishing domestically, and into overseas markets, among other tactics. But the standard private-equity playbook is a mixture of slashing costs and pumping up cash flow. Sometimes this pays off, at least for the private-equity firm, because there are workers to let go and assets to sell.
But the push toward pure short-term profit maximization can get ugly. Although private equity’s foray into book publishing is new, funds have been buying up news publications for the past decade. When they do, they tend to lay off reporters and editors, cut back on print editions, and invest less in the resources necessary for great journalism. Alden Global Capital, one of the most infamous, is known for acquiring newspapers and then selling off their buildings to its own real-estate-flipping subsidiary. (In at least one case, that resulted in a major newspaper paying rent to Alden for office space it used to own.) But those moves may not apply to book publishing. Simon & Schuster does not own the building at Rockefeller Center that bears its name. It has only about 1,500 employees, and KKR has said that no layoffs are planned.
So the new owners might seek other ways to juice short-term returns. Dan Sinykin, a professor at Emory University and the author of the forthcoming Big Fiction: How Conglomeration Changed the Publishing Industry and American Literature, predicts that KKR will double down even more than big publishers already have on proven authors or celebrity memoirs, at the expense of riskier unknown writers—an approach akin to Hollywood’s love of the sequel. To a cost-cutter, established brands substitute for expensive marketing.
Book publishers make money from sales of an original product, a portion of which goes to authors in the form of royalties—perhaps the true pot of gold for private equity in publishing. Although there’s nothing wrong with monetizing intellectual property, Simon & Schuster authors should expect intense pressure to give the publisher a bigger slice of that pie. A more speculative possibility involves the use of authors’ original work to train AI models that then generate new monetizable content. That scenario could provide KKR’s Simon & Schuster with a way to squeeze out money through co-ownership of copyrights, a prospect that alarms authors. “If you train an AI model on Danielle Steel’s nearly 200 books and write a new one, somebody has to own the rights,” Sinykin says.
Ultimately, KKR may not even need to solve the riddle of increased profitability. As is often the case with private equity, it can profit even if Simon & Schuster does not. The $620 million not covered by debt will come from a fund that KKR assembled from a collection of entities including a dozen state pension funds, a Chinese insurer, and a pilots’ union in Iceland. Appelbaum predicts that the sliver from KKR itself could be 2 to 10 percent, or $12.4 million to $62 million. (The actual amount isn’t public.) KKR put up only 0.06 percent of its own money in the RJR Nabisco takeover.
But the company can start harvesting cash immediately. Private-equity firms collect “management fees” from their own investors and “monitoring” or “advisory” fees from companies they purchase. KKR and its partners collected $185 million in advisory fees from Toys “R” Us before bankrupting it. With Simon & Schuster, fees alone could let KKR make its own money back in a few years.
Another technique for extracting money goes by the opaque name “dividend recapitalization.” A recent headline in The Wall Street Journal described it more transparently: “debt-fueled payouts.” The acquired company issues a bond to raise money that is then paid out to its new owners and used to refinance old debt. It’s a common tactic in private equity. Earlier this year, KKR pulled $750 million ($385 million for itself) out of Atlantic Aviation, which provides services to plane owners. The company now groans under a debt load seven times its annual earnings, according to Moody’s.
In their recent book about private equity, These Are the Plunderers, Gretchen Morgenson and Joshua Rosner recount maddening stories about KKR: how it bankrupted Toys “R” Us; gouged residents of Bayonne, New Jersey, for water and sewage; and, very recently, ran a vital provider of emergency services into the ground. If KKR’s latest deal follows a similar trajectory, Morgenson and Rosner might have a harder time documenting it. Their publisher is Simon & Schuster.
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