Tuesday, August 7, 2012

Speaking of Private Equity...

If McGraw-Hill decides to sell its educational publishing business rather than spin it off into a separately listed corporation, an interesting feature of the global higher education publishing business will no doubt be created: around 60% of it will be in the hands of private equity.

For it seems inevitable that it will be a private equity purchase – or no sale. No other publicly traded publisher (e.g. Pearson) could get a purchase past the Department of Justice. 

Even private equity held Cengage (i.e. Apax) might have some issues, but they would probably get it approved by disposing of a few juicy competing assets. (But then what would they do with McGraw's huge K-12 business in the US? They'd on-sell it surely.) 

I think Apax have shown that PE investment can work if you hire and stand by the right people and have the courage to go the distance. CEO Ron Dunn, a respected industry veteran, has overseen a pretty good period for Cengage (no real growth, especially outside the US) but they haven’t gone backwards or gone broke. They have managed to pay the interest on their $5b debt, and they have just recently secured agreement to extend maturity on some of the senior components of that debt. Apax would still be hoping for a successful IPO in a year or two. They may not get the $7.7b they paid, but they would get a fair portion (if the market returns) and retain a substantial interest in the business as well. So PE has not been a bad ownership model for Cengage and has probably driven a lot of value mainly by carving waste out. There have been negatives, but nothing like the stupidity of the Fulcrum model with Wooldridges.

Other bidders will be PE firms (Apollo, Bain, others) and who knows what operating model they would bring to bear. But you can bet your boots they'll savage costs ferociously. With today's historically low interest rates, they would certainly load the business up with lots of debt, but McGraw with decent, more supportive management could be a much better business than it has been over the past decade. 

So I think we can look forward to seeing McGraw, Cengage and Houghton Mifflin Harcourt all in PE hands within the next 6 months. 

That leaves Pearson and Wiley as the big non-PE players in Higher Ed. And they'll have to take an axe to their costs too. It won't be enough to just have the right 'digital strategy'. They'll need to learn a new level of ruthlessness to compete. The old printed textbook business can't just be allowed to die off. It has to be killed.

It won't be pretty.

No comments: