Two of the world's biggest publishing houses are to link up in a deal that will bring the writings of classics like George Orwell's 1984 and this year's literary phenomenon Fifty Shades of Grey under one umbrella.

Confirmation that Pearson will merge its Penguin Books division with Random House, which is owned by German media company Bertelsmann, will create the world's largest publisher of consumer books, with around a quarter of the market.

As well as publishing books from authors such as John Grisham, Random House scored a major hit this year with E.L. James' Fifty Shades. Penguin has a strong backlist, including Orwell, Jack Kerouac and John Le Carré.

The two companies said Monday that Bertelsmann would own a controlling 53 percent share of the joint venture, which will be known as Penguin Random House.

Bertelsmann would keep full control of Verlagsgruppe Random House, its trade publishing business in Germany, and Pearson would retain the right to use the Penguin brand in education.

The combined company will control 26 per cent of the global consumer publishing market, leaping ahead of the 17 per cent share of French publisher Lagardere, according to research by Espirito Santo Bank.

News Corp. interest

The announcement may lay to rest the ambition of Rupert Murdoch's News Corp. of netting Penguin. Reports over the past couple of days have indicated that News Corp. has expressed an interest in buying Penguin for 1 billion pounds ($1.6 billion US) in cash. News Corp. owns HarperCollins, another big publishing house.

Under the terms of the deal, Random House worldwide chief executive Markus Dohle will be CEO of the new group while Penguin's CEO John Makinson will be the chairman of its board of directors.

'The two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers'—Marjorie Scardino, Pearson

"Together, the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers," said Marjorie Scardino, chief executive of Pearson.

And Bertelsmann's Dohle said the link-up will "create a publishing home that gives employees, authors, agents, and booksellers access to unprecedented resources."

The closing of the deal is scheduled to take place in the second half of 2013 following regulatory approval.

Fighting 'gorilla of the book business'

"We believe the tie-up is a sensible one, although it is clearly a defensive response to the long-term pressures affecting the industry, including dramatic growth in digital retail channels, self-publishing and digital reading," said Jonathan Jackson, head of equities at Killik & Co.

Because of the digital challenge, analysts at Jefferies International said they would have preferred Pearson to sell off Penguin altogether. 

"The gorilla of the book business is no publisher, it's Amazon and it will stay that way," they said in a research note.

Pearson said the deal does not require approval by shareholders; Bertelsmann is privately owned. Pearson shares were down 1 per cent in midmorning trading in London.

The Financial Times, a Pearson publication, reported Monday that News Corp. had approached Pearson "at the highest level" about a possible cash offer for Penguin. The Sunday Times, owned by News Corp., reported that Murdoch was prepared to offer 1 billion pounds in cash.

Pearson declined to comment on the possible interest of News Corp.

In 2011, Random House reported revenues of 1.7billion euro ($2.2 billion US) and operating profit of 185 million euro. Penguin had revenues of 1 billion pounds and an operating profit of 111 million pounds ($178.7 million US).     

Pearson meanwhile reported that its operating profit in the first nine months of the year fell 5 per cent although revenue increased by 5 per cent. Revenue from Penguin was down 1 per cent on a constant currency basis.     

The company attributed the profit drop to its sale last year of its half share of FTSE International, a joint venture with the London Stock Exchange.     

The Bertelsmann deal is part of Pearson's strategy of focusing more on its education business. Penguin accounts for about 10 per cent of the company's book sales.