Valuation Guide: Book Publishing

Description of the Industry

The book publishing industry (SIC 5111, NAICS 511130) is engaged in the production of books. Publishing companies carry out the design, editing, marketing, and distribution of books.  Publishers may distribute books in print, audio, or, increasingly, electronic form.  Textbooks make up the largest segment of book sales, followed by adult trade books, technical/scholarly books, children’s books, and other books and services.[1]

The U.S. book publishing industry is comprised of just over 3,000 establishments with over 100,000 employees generating combined annual revenue of about $28 billion.[2]  Although individual publishing companies have adapted to shifting market conditions with varying degrees of success, many agree that the print publishing industry is in decline.[3] In response to competition from new technologies and mega-retailers such as Amazon, book publishers have been forced to adjust pricing on their already low margins.  Annual growth over the last five years has averaged –2.2 percent.[4]  Industry analysts anticipate that this downward trend will continue into the future.[4]

Barriers to entry are moderate for the book publishing industry.[5]  The most significant barrier is time.  It can take a significant amount of time to establish a reputation with authors and their audience.  A successful publisher will have expertise in their field, a strong reputation among writers, discerning manuscript readers, good relationships with distributors, an effective marketing team, and a track record of successful books.[5]

The “Big Six” publishing companies are:[6]

1. Random House (owned by Bertelsmann)
2. Penguin (owned by Pearson)
3. Harper Collins (owned by News Corporation)
4. Macmillan (owned by Georg von Holtzbrinck)
5. Hachette (owned by Lagardére)
6. Simon & Schuster (owned by CBS)

Industry Trends

Trends in the publishing industry have changed over the past several years, especially in response to shifts in technology. A few of the most significant changes are:

1. E-books are becoming more popular.  Digital technology is having a profound effect on the book publishing industry.  Electronic books are becoming increasingly popular, and dedicated e-readers are expected to reach 15 to 20% penetration within the next few years.[7]  Initially, the publishing industry struggled to price e-books due to differences in cost and production between e-books and traditional printed books.[5]  Prices on e-readers continue to sink and become affordable to a wider audience.  Although e-books currently only make up a small portion of publishers’ revenues, the share is rapidly growing, while book publishing revenues as a whole have been decreasing.  As of 2010, 5 percent of book sales were e-books, but that amount is expected to reach 20 to 25 percent by 2015.[7] As a result, publishers are increasingly investing in the development of new products aside from traditional printed books.

2. Textbook sales are increasing.  The textbook and trade book industries will continue to see substantial growth as student enrollment levels reach record highs.[4]   Textbooks make up about 27 percent of sales, followed by trade books at 26 percent and professional/technical/scholarly books at 22 percent.[1]  Growth in these fields could provide substantial relief to a declining industry.

3. The industry is consolidating.  Publishers often experience economies of scale and cut overhead costs through consolidation.  Additionally, the large investments necessary to develop digital publishing technologies have pushed firms to consolidate.[5]  Through consolidation, publishers hope to better fend off competitors.  Recently, for example, the publishing divisions of Bertlesmann and Pearson announced that they plan to merge to create Penguin Random House. Once the deal is final, Penguin Random House will be the largest consumer book publisher in the world, with control of 25% of the market and annual revenue of about $3.8 billion.[6]  Mergers among the top publishers are expected to continue, making it increasingly more difficult for smaller and mid-sized firms to compete.[6]

4. Self-publishing is gaining popularity.  Self-publishing has become increasingly popular since self-published authors can use the Internet to find a following.  Authors can self-publish as printed books using print-on-demand services, or more commonly, as e-books.  Self-publishing allows authors who may have a small niche market the chance to publish work that might be unprofitable or risky for a large publisher.  Many publishers dismiss self-published books, noting that they are often unsuccessful, but others recognize that it may pose a threat when it comes to established authors who already have a following.[8]  In generally, a self-published e-book will net a higher margin for authors, but self-publishers do not have the advantage of a publisher’s editors, marketing team, publicists, and distributors.  In an attempt to gain market share, self-published authors often price their books very low, often as low as 99 cents.[9]  The average income for self-published authors from sales of self-published books was a mere $10,000 last year, with less than fifty percent of self-published authors earning $500.[10]

Summary of Valuation Approaches

There are four commonly accepted valuation methods that should be considered when valuing a publishing company:

1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business value is equal to the cost of acquiring its physical assets.

2. Income approach to value (capitalization of earnings): This method is most applicable for publishing companies that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).

3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established publishing companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.

4. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded publishing companies and privately held publishing companies.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following average benchmarking data is based on studies from various book publishing companies:[11]

	2007	2008	2009	2010	2011
Operating Profit (% of Net Sales)	6.2	3.6	2.8	3.7	6.5
Sales/Net Fixed Assets	22.3	22.7	24.6	24.1	29.5
Current Ratio	2.0	2.2	2.1	2.2	2.0
Quick Ratio	1.0	.9	.9	1.1	1.0

Before using this data for specific valuation purposes it should be evaluated for appropriateness.

Industry Organizations and Publications

Some organizations and publications that publish helpful information include:

1. Association of American Publishers: www.publishers.org, an organization with more than 200,000 members involved in the U.S. book publishing industry
2. Publishers Weekly: www.publishersweekly.com, “the international news website of book publishing and bookselling including business news, reviews, bestseller lists, commentaries”[12]
3. Independent Book Publishers Association: www.ibpa-online.org, resources for book publishers

Availability of Publicly Traded Comparable Companies

Several publicly traded publishing companies, by market capitalization, are:[13]

1. News Corp ($58.5 billion)
2. McGraw-Hill Companies, Inc. ($15.7 billion)
3. Pearson ($15.6 billion)
4. Navneet Publications ($15.5 billion)
5. John Wiley & Sons, Inc. ($2.4 billion)

It should be noted that some of these companies also engage in a variety of other business activities and are not exclusively book publishing companies.  Based on a number of publicly traded book publishing companies, the book publishing industry has a price to earnings ratio of 12.4.[14]

Availability of Private Purchase Transactions

In addition to public publishing companies, data regarding privately held book publishing companies can also provide a useful benchmark when valuing a publisher. The size and scope of private publishing companies that have been bought and sold recently varies greatly, both in terms of their sales and the purchase prices paid for the companies.

Two purchases of private book publishing companies over the five year period from July 1, 2007 through June 30, 2012 show the following ranges:[15]

1. Total deal values ranged from $220,000 to $1,556,370.

2. Market value of invested capital (MVIC) to net sales ranged from 0.5 to 1.0 times.

These ranges are based on an extremely small sample and are too large to be useful without further analysis. As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject.  Additionally, industry economic conditions also vary over time, which can affect book publishers as investment opportunities.

Fulcrum Inquiry performs business appraisals for publishing companies and other businesses.