Bloomsbury seeks new magic to break the Potter spell

Publishing group looks to end dependence on JK Rowling publishing success

After ten years of stock market success Bloomsbury Publishing is best known as the home of the Harry Potter books.

After ten years of stock market success Bloomsbury Publishing is best known as the home of the Harry Potter books.

The UK company has built the publishing phenomenon of the past decade on the back of JK Rowling's trainee wizard franchise; but the magic looks like it is beginning to wear off and investors are starting to ask whether forays abroad and investment in new authors can keep the company growing at a similar rate.

Despite announcing group sales up 22.2 per cent to £83.1m yesterday for 2003 and pre-tax profit up 38.3 per cent to £15.38m, the Harry Potter spell has lost its power as far as Bloomsbury's rating is concerned. The company's shares, up 4.5p to 249p yesterday, are trading on a price earnings multiple of about 15 times this year's earnings, quite a discount to the media sector's average of about 19.

The reason, after 10 years of unbroken stock market success, is the uncertainty surrounding the question of what comes next for a company that derives about half its sales from the J K Rowling series.

The answer, according to Nigel Newton, the company's chairman, lies overseas ­ always a risky business for a relatively small company ­ and investment in new titles and authors.

"We are seeking our future growth in the two book markets in the world that are larger than our own: the US and Germany," says Mr Newton. "This move makes good sense because our bigger titles in the UK are big sellers in these other markets. If we discover them, why not be in a position to publish these in other markets as well?"

What really excites Mr Newton, more perhaps than even this year's Harry Potter paperback launch, is an acquisition his company made in 2003. A first novel by the author Susanna Clarke, called Jonathan Strange and Mr Norrell, is being talked about by Mr Newton as one of the biggest of the year. "We bought the world-wide rights for this book with the view to it being a bigger seller in Germany and the US than here in the UK."

Already in the US Bloomsbury is publishing a growing a list of titles originated both here and in North America. Its US children's list is firmly established with titles such as Herbie Brennan's Faerie Wars, and its adult list includes such well know titles in the States as Sloane Tanen's Bitter with Baggage Seeks Same. Sales in North America are now running at £9.06m.

In Germany, Bloomsbury last year bought Berlin Verlag, a local publishing house controlled by Bertelsmann, the media giant. It has stripped out costs and is running the business as an independent publisher. A German children's list has been launched, called Bloomsbury Kinderbucher, and the adult list combines local authors such as Mirjam Pressler with international bestsellers. It is contributing to European sales up from £3.4m in 2002 to £11.3m last year.

So at the heart of Bloomsbury's future success are books like Ms Clarke's doing well internationally, along with Mr Newton's ability to reinvest wisely the prodigious amounts of cash that his company's Harry Potter publishing rights generate. Are we therefore seeing the emergence of the post-Potter Bloomsbury?

"That would be one way of putting it, yes," said Mr Newton, who founded the company in 1986 and floated it on the stock market eight years later. His relatively modest 5 per cent stake in the company is now worth about £8.5m.

"When I left university books were an attractive area to go into. I loved books. After I joined Macmillan I came to love everything about making and publishing books: not just reading them, but also selling them and being involved in the process of them being brought to the attention of literary editors.

"When we started the company we were in three areas: publishing literary fiction, reference works and a publisher of general non-fiction. When we floated on the stock exchange in 1994 we started on new ventures in the field of children's books and paperbacks.

"One of the first children's titles was Harry Potter and the Philosopher's Stone, and one of the first paperbacks was Snow Falling on Cedars, which went on to sell more than 1 million copies. These were our core areas. Then in July 2000 we bought A&C Black, a long established publisher of reference works." Since then Mr Newton has added more reference works such as Who's Who and Whitaker's Almanack.

Born in California, the 48-year-old Mr Newton has now built a business that would certainly stand alone these days even if he had never heard of Hogwarts and the rest. One analyst said yesterday: "If you split Bloomsbury in two and separate out the Harry Potter business you would still be left with a publishing business that most bigger houses would be extremely envious of."

Bloomsbury's other fiction authors include the likes of Donna Tartt, whose second novel, The Little Friend, was Bloomsbury's biggest seller on its adult fiction list last year. Its paperback titles were further strengthened in 2003 when the full paperback rights to the back list of Michael Ondaatje, including The English Patient, reverted to Bloomsbury from a third-party publisher.

It publishes other big names such as Joanna Trollope and owns such non-fiction classics as Peter Collin dictionaries, a share in the Encarta reference works, and Wisden Cricketers' Almanack. Another recent bestseller on Bloomsbury's list was Schott's Original Miscellany, a surprise hit ever since it appeared in 2002. In fact while Bloomsbury is still almost universally known for its Harry Potter associations, its interest in the global franchise is actually quite modest.

Its ownership of the character extends to the English-language publishing rights around the world, but not in the US. Foreign-language rights are also excluded. So the two book markets bigger than Britain, Germany and America, are outsideBloomsbury's grasp as far as Harry Potter is concerned. The wizard movies belong to Warner Brothers, while all the merchandising is licensed to various toy manufacturers around the world.

That said, what rights it has to Harry Potter are currently generating at least £40m a year for Bloomsbury. Such a valuable endowment is helping the company generate operating cash flows of £14.65m. At the end of 2003 its net cash position stood at £28.32m and shareholders' funds were £58.8m.

Harry Potter represents a valuable annuity income, presumably stretching far into the distance. The key for Bloomsbury shareholders is how Mr Newton uses it. "You only have to look at Tolkien to be reminded that some of the biggest books are the children's classics written many decades ago," he says.

But this year, Harry Potter may be big but other developments at Bloomsbury will be bigger, at least as far as the company's long-term future is concerned. "The important thing about 2004 is that we will see bigger contributions from some of our previous investments and acquisitions. We will see the first full 12-month contribution from Berlin Verlag while our biggest growth prospects are in the US," says Mr Newton.