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.

Wooldridges Fails to Make the Grade

The last nail was hammered in yesterday as administrators Grant Thornton were called in to pick over the pieces of the once-thriving school bookselling business, Wooldridges.  

Many reasons will be given, many excuses trotted out, but the long and short of it is that the private equity owners, Fulcrum Capital Partners, have botched it completely. They have destroyed value on an impressive scale. By ignoring advice, by stubbornly adhering to the wrong retail strategy, and by failing to grasp the fundamentals of the school resources market, they have not only ruined a business and the jobs of its employees, they have set in train a process that may well lead to the end of the booklist system of supply in WA.

This is a sorry saga but one rich in lessons. As the commentary on what went wrong starts to flow, we will hear about pernicious online bookselling, about the GFC and cautious consumers, about failed partnerships with stationery suppliers, about aggressive direct selling by publishers - the carbon tax might even get a run.  But the real problem, as always, has been the owners and directors, in this case the partners at Fulcrum Capital who acquired the business in 2008.

They should be held fully responsible for the mismanagement of a simple, profitable and durable business. They have ruined a good operation and lost upwards of $50 million.  Some of that loss will be borne by suppliers but most will be written off by the two major investment banks which either invested in or lent to the holding company, ESA Holdings Pty Ltd. More fool them. We can only hope that the individual partners at Fulcrum also get to feel a bit of the pain.

The clear lesson in all of this is that good companies are run by good people. Good businesses need managers who understand the market they are operating in, who listen to advice from experienced industry players, who aren’t afraid to look a bit old-fashioned from time to time, if that’s what the market wants. A school booklist business sells books and stationery and other stuff to schools and to parents. It’s that simple. The business challenge is how to make that supply process as efficient as it can be. 

Of course, there is always the need to think about big operational and strategic issues, about exit plans, about competitor activity and about other threats and opportunities, but if only Wooldridges had kept as their first priority running a great booklist business. If it had, it would still be around to ponder and overcome all the worries of cash flow in a seasonal business, the growth of digital learning, and how to grow the business across state borders. If only Fulcrum had hired good managers, listened to them, and let them get on with their jobs. The arrogance of private equity and investment banking involved in this wreckage is breathtaking. But then, how many examples can you think of where private equity flowing into a book business has turned it around and spawned new life? 

There was a fundamental problem with Fulcrum’s investment strategy, and it is a shortcoming of private equity investment in many traditional businesses: they didn’t care about, or care for, the business they had bought; they were only interested in the business they were going to sell. It had to look smarter, and books are old-fashioned; it had to look diversified, but schools don’t put interactive whiteboards on booklists; it had to look national, regardless of market variances.  

It now looks dead. 

And you can bet your boots it will stay that way. Prospective buyers may well steer clear not just of the Wooldridges corpse but of the entire WA booklist market, because the biggest worry in all of this is what might flow from it. Will schools continue to take the risk of handing over their book supply to a private operator?  Will the WA Government continue to ignore the positive (or at worst neutral) effects of the booklist model having been abolished in most other states? Will parents continue to tolerate the failures of the past couple of back-to-school seasons? Quite possibly not. A class-set or book-hire model would save parents thousands of dollars over the 12 years of schooling, and it would avoid forever the mayhem of recent years. And when WA makes the change without significant pain, what about Victoria? How many millions of dollars could this end up costing the educational publishing industry? 

Well done Fulcrum.

The Book Trade Declares the PIRs Dead

The real meaning of the new 14/14 importation protocol agreed to this week by Australian publishers and booksellers is not the significant reduction in the time period granted rights holders to gain exclusivity, but the fact that the trade as a whole has so explicitly walked away from the 30/90 day legal provisions in the Copyright Act.


It's been less than three years since the trade universally declared its religious adherence to these Parallel Importation Restrictions. They were aggressively touted as the very foundation of Australia's vigorous, successful, culturally important book industry. Had the government adopted the Productivity Commission's recommendation to abolish them Australian publishing would collapse. The market would be swamped by cheap imports; our local stories would cease to be told.


Now the trade has admitted these loud proclamations of doom were a complete nonsense. And it's no defence to say that the 14/14 agreement will act in exactly the same way. No-one will be counting. No-one has ever counted. The walk-away from the PIRs embedded formally in the Act means that, finally, the trade has moved beyond any notion of binding PIRs full stop. The long and tedious debate that has bedevilled the industry for so long is finally over.


It should now be easier for all players to recognise what have been the real facts of importation and rights-acquisition all along: that exclusivity is granted by contract and contract alone. And it is maintained by operational and competitive excellence. The fiction that the PIRs formally granted territorial copyright, rather than simply prevented booksellers from buying around, has finally been blown away.


Australia has now become, for all intents and purposes, an 'open market'. But an open market with a clear Australian definition: exclusive by contract but not by legislation. It will not be, as too many UK publishers and their colonial sympathisers have long assumed, a non-exclusive market for 'competing editions'. By virtue of our distance, population size and book trade infrastructure, there will always be one Australian rights holder, and that publisher will protect its exclusivity by reasonable  pricing, professional servicing, and fair trading terms. Booksellers will order from them as a matter of course and default. 


The 14/14 day push by the ABA has been far more successful than anybody could have anticipated. The booksellers have ended the PIR regime by stealth, not by aggressive lobbying for legal abolition, which they were loathe to do anyway, and which has proved to be unsuccessful for so long. They deserve to be congratulated.

Book Pricing in Australia: a personal story

Nobel prize winning economist Paul Krugman has been published by Norton in the US for eons now. When I saw that his latest book was to be published on 30 April in the US I immediately placed a backorder for it on Amazon, knowing I'd get it within a few days of release, and knowing also that Norton invariably sells Commonwealth rights to every Krugman title, and the Commonwealth edition comes to Australia weeks or even months later with far lower production standards but at an inflated price.


I did get the handsome US edition three days later, at a total cost of $60.00 including $35.00 for freight.


However, as it happened, I went to Readings in Carlton that same day to buy something else, and whoa...there on the new release shelf was the new Krugman! The US edition.


Wiley, who represents Norton in Australia, had secured the Australian rights and released it on the same day as the US edition, and priced it at the exactly right price of $32.95. The US price (it's a hardback) is $24.95. 


Do the math: multiply $24.95 by 1.10 (to cover currency volatility); then by 1.10 again for the GST: that comes to $30.19. Round up to the nearest traditional price point and you get $32.95.


Well done Wiley! The old firm has obviously held onto some fundamental values I introduced years ago! 


So I was dudded by ordering from Amazon.

But then again, another hardback I bought yesterday was the new Robert Levine book on the copyright wars called Free Ride, published by Random House. The Commonwealth edition was released recently in Australia at a price of $49.95. Using the same pricing logic as above it should have been no more than $36.95. Here's the math on a UK title: £18.99 divided by 65 (average exchange rate over the last few months); multiplied by 1.10; multiplied by 1.10 again. This comes to $35.35, so rounded up to the nearest price point is $36.95.


Soooo...Random, why are you pricing this book at an outrageous $49.95? 


The answer is obvious: to send people to Amazon!

Another Wooldridges Closure

This announcement was sent to suppliers today:

 Dear valued supplier,

I am writing to advise you of the final stage of the east-coast restructure of the Education Works distribution business. Along with the closure of stores in Moorabbin and Magill, we have this week announced the closure the Jacaranda store in Canberra.

With this decision, the Education Works staff and product distribution will be based in Western Australia. We feel this is the best structure for our business to renew our focus on providing the best possible customer service for our customers throughout 2012 and ahead of the 2013 back-to-school program. We will retain a sales force in the eastern states but will no longer maintain a full-time retail shop presence.

Many of you will now have met with our new National Product and Marketing Manager – Tim Bradstreet. Tim will be spending more time with you in the coming months.

From May 2012 all deliveries should be made to our West Coast distribution centre at 426 Scarborough Beach Road, Osborne Park, Perth.

If you have any queries relating to specific shipments, please contact Glenn Gaudion, EWA National Procurement Manager at ggaudion@educationworks.com.au.

Thank you for your support during this period of transition for our business. We look forward to on ongoing partnership with you throughout 2012 and beyond.

Kind regards,

Kevin Healey

Executive General Manager

Education Works

It’s Back to School for Wooldridges

The well-known school bookseller, Wooldridges, has recently announced the closure of key stores in Victoria and South Australia and has set in train an organizational contraction that will see the business centred back on the original Wooldridges operation in Perth.  This follows the previously announced closure of several of their WA shops.  The announcement reads like the last weary paragraph of a drawn-out saga.  Their much-touted national expansion has come to nothing.  Their retail presence will be shrunk to a few stores that they’ve acquired over the past 5 years.  And they have egregiously failed to create a national back-to-school brand.  Their recent poor performance in processing booklists in Victoria has, in fact, destroyed much of the reputation and goodwill that they have paid so much for in their failed attempt to become the big player in Australian school supply. 

Where did they go wrong? Was it strategy or execution or both?  Why has the aggregation of a number of previously successful small Australian school suppliers been such a dismal failure.  The answer lies, unsurprisingly, in their single-minded, hear-nothing, see-nothing drive to impose private equity preconceptions onto an existing market.  Rather than unlocking value, they have destroyed it.  Rather than investing in and updating the cottage industry business systems that they had acquired, they looked for economies.  Rather than hiring and heeding seasoned industry heads, they have ignored advice and gone their own way.  Rather than recognizing the prescribed nature of school book purchases, they have sought to create a discretionary retail environment.   And the results speak for themselves. 

Fulcrum Capital Partners, a Sydney private equity firm, entered the school supply market in late 2007 when they acquired Wooldridges from the Majors family in Perth.  The transaction was run through their acquisition vehicle, ESA Holdings Pty Ltd, which took over the management of Wooldridges and set about buying other Australian school suppliers.  The goal was to become the dominant national player.  They were successful in picking up a number of smaller businesses and looked set to quickly put together a sizable Australia-wide operation. Some of the well-known names caught in the ESA net were Jacaranda Educational Supplies in Canberra, Endeavour Books in Melbourne, and Seelect and Kelly Farm in South Australia.   They also acquired Elizabeth Richards, a supplier of classroom non-book materials, in Sydney.  They even bought a school photographic business, Fotoworks, in the belief that their pipeline into schools could be used to deliver all manner of products.  Many other targets were approached and offers made.  So far, so good and heady stuff for the low-tech, dusty world of school bookselling.  But throughout this period of frenzied growth, it was starting to become clear that there was no appreciation of the nuances of the school market.   We can only imagine the mess today had they been more successful in their acquisition blitzkrieg.

They hired, as their first CEO, Greg Browne, an industry veteran with Australian and international experience.  He was a good choice.  If anyone understood school publishing and bookselling dynamics and how to profit from them, as books become apps and booklists become subscriptions, it was him.  But Browne only stayed a year.  Perhaps that was the first writing on the wall.  His departure came soon after ESA’s failure to acquire Landmark.  Owned by the Porche family, Landmark was Australia’s second largest booklist supplier and had developed sophisticated systems to cope with the intensely complex back-to-school booklist process and which had capacity for continuing growth.  They had a scalable business.     

ESA clearly undervalued Landmark.  They saw them only as a larger version of the smaller businesses that they had been buying – not as the only major player other than Campion in the national booklisting market.  Their private equity bias was to see the superficial commonalities in an industry not the nuances.  Commonalities make for impressive long-term financial modelling.  Nuances are a nuisance.  But the school resource market in Australia is riddled with discontinuities and wrinkles: state by state, private versus public, primary/secondary, booklist/class-set/book hire, print versus digital, national and state curricula, and so on.  It is a complex market in which the constant changes, inconsistences and local peculiarities provide the opportunity for profit, but, most importantly, in which the only significant profits are made by providing year-on-year, great service to the big booklist schools.

Buying Landmark would have given Wooldridges critical mass and credibility.  They would have become a genuine national operator and they would have acquired the people and the systems needed to build a bigger business.  Most importantly it would have given them the time to refine their strategies and to create detailed plans for execution.  Instead, with Landmark subsequently acquired by Campion, the already dominant market leader, it was virtually game over.  Wooldridges had nowhere to go or to grow - other than towards their fixed and whimsical vision of a retail school supply model.   Their efforts and investment were focused on building a big, recognisable, high-street brand. 

Browne was followed by Tony McKimmie, previously of Lonely Planet, but he too was a short-term tenant.  It seems likely that McKimmie was hired to bring in a more consumer-oriented approach; he was someone who had worked in a publishing organization that was built on direct and retail selling.  This was where Fulcrum wanted to take the ESA businesses.  But McKimmie didn’t last either.  Others followed and each came with less industry experience and a heavier retail bias.  The idea was clearly to create a household name which parents would go to when buying school resources for their children.  A Bunnings of back-to-school. 

But, of course, that’s not how it works.  Schools choose the resources they want to use.  They then put them on a booklist for parents to buy or they buy them in class sets, or subscriptions, themselves.  They don’t send parents or students out into a retail environment to browse for suitable curriculum material.   The way to success for a supplier of these materials is to work closely with schools to better understand (and to understand earlier) their needs, to have close and trusted supplier relationships (mainly with the key educational publishers) and to have completely reliable systems for ordering and processing the tens of thousands of book and stationery items that go into each crazy back-to-school season.   ESA, it seems, just didn’t get it.  They are now left with a jumbled group of companies that doesn’t possess the wherewithal to manage the school business they have, let alone to grow it.  Maybe a jumble sale is the natural next step.

It is unlikely that Fulcrum would recover much of their investment if they put their ESA assets on the market. There are few buyers and there is no evidence of them developing a mature or even an emerging national brand; there is no evidence of any significant investment in technology or systems; nor evidence of a coherent digital strategy to allow them to profit from the rapid changes that are sweeping through the school supply market.  It has been a sorry tale of lost opportunity, except for the lucky few who reaped the early rewards of Fulcrum’s investment in this market.  The individuals and families who sold to ESA will be happy to have been paid handsomely for their businesses, but even the most hard hearted of them will feel some disappointment in the way those businesses that they had carefully built over decades have been managed and mismanaged since.

A Parallel Universe? Book Industry Strategy Group's (BSIG): Final Report.

Unlike most industry observers, I was very cynical about Industry Minister Kim Carr's establishment of the Book Industry Strategy Group when he announced it in February 2010. 


The Group's final report to government has just been released.


It's 100 pages long and is in two parts. Part 1 regurgitates the awful PwC report I reviewed here, and Jenny Lee's excellent summary of the industry's progress in going digital. (Both of these reports are on the BISG's official website here). So don't read this first part. You'll be put off, particularly as you'll have to read all of the Group's final recommendations without the benefit of the full context and background information which is the only way they make sense.


Part 2 starts at page 45 and is well worth reading. Surprisingly, for a document like this, which must have had so many inputs, it is generally well written and it pretty much sticks to the facts. Titled Transforming the Industry, it's obviously rather bold and visionary, but manages to stay calm and unemotional. Is it naive? Probably. Optimistic? Certainly. Unrealistic? Undoubtedly. But in its rationality I found it persuasive. An ambitious agenda, spelt out clearly and in detail. 


It's mainly concerned with establishing the rationale for the 21 recommendations. The first, and probably most important, is to establish a Book Industry Collaborative Council with membership from all sectors of the industry. This council would be charged with articulating and implementing the ambitious reform agenda envisaged by the BSIG, and would have a direct line to government. Nowhere was there any hint as to how this Soviet beast would be funded. Presumably it would have a full time director, with some support staff, but that's not clear. Perhaps Carr's department will fund it through one of its programs, because it will surely be all form and no substance otherwise. 


However, philosophically, it's hard to get beyond the elemental fact that industries change and develop through market forces and competitive pressures, not by the determinations of councils, committees and bureaucrats, no matter how supreme or benevolent. And we're mostly talking about a global publishing industry now. It's been a long time since those industry dynamics in Australia were mainly determined by Australian management. 


The next two recommendations advocate abolishing the GST on books (or the $1000 GST-free threshold on imports), and fixing the high parcel postage rates for deliveries within Australia. I guess we had to expect this sort of stuff.


Then comes an interesting one: reduce the 30/90 day rule to 14/14. This is obviously a win for the booksellers who argued in their submission for 7/14 days. To get the publishers to go along with this looks like quite a victory. The APA recommended the 30/90 provisions be extended to ebooks, a category mistake if ever there was one.


Of course the 14/14 change is akin to the familiar Arab Despot manoeuvre: throw some democratic tidbits at the angry mob in order to protect the regime. As the report insinuates time and time again, high Australian prices, set by publishers and unrelated to the high dollar, are the root cause of the retail uncompetitiveness problem. It's the elephant in the room but the BSIG is content to ignore it. The same old conceptual confusion about what constructs territorial copyright is there in all its glory.


The booksellers had another win in their push for a thorough-going reform of publishers' distribution practices. Recommendation 6 wants the industry to establish a goal of 48 hours from order to store (it's currently 3-5 days if you're lucky!), and have the Soviet BICC tasked with the necessary 'rationalisation, standardisation and consolidation'. How on earth this body can do this without having a mandate to be able to dictate to private companies is anyone's guess: 'Close your pathetic little warehouse and go through UBD or ADS'! Can't see it. Only intense competition can make things like this happen. 


The appalling lack of regular, comprehensive, up-to-date industry stats is confronted, with a recommendation that the ABS and the industry jointly fund regular compilations, beginning in 2012/3. Will the industry be able to raise about $200k per time? Yes, in my view, and the money should come from CAL. 


There's quite an odd recommendation to resurrect the old National Book Council to source additional funds from private sources to support Australian publishing. Someone on the committee should have thrown a bucket of cold water over whoever suggested this!


The government is being asked for quite a bit of money, $50 million or so, which is hard to take seriously, even as an ambit claim: 


- $5 million for TitlePage stage 2;
- $10 million (matched by $6 million from universities) to subsidise the publishing of scholarly monographs;
- About $1 million for the ABS for the collection of statistics;
- $30 million for schools to be able to purchase digital learning resources for the National Curriculum;
- $5 million for a grants program for academics to encourage textbook authorship;
- $1.5 million to double the existing Literature Board grants;
- Close to $500k, I suspect, in making all author prize money tax exempt;
- Plus sundry smaller amounts for small business development grants, printing industry transition, support packages for displaced printing industry employees, and additional miscellaneous funds for writers.


Despite the fact that the rationale for all this funding might make a great deal of sense theoretically, and that the arguments are well marshalled, and that the recommendations (mostly) are worthy, everyone knows that only a very small part, if anything, of what is being asked for will be forthcoming. Piddling stuff that bureaucrats can give a nod to, under the political radar. There'll be no large grants or government funded initiatives. We don't live in that sweet mendicant universe any more.


You can make a case that the industry has been conned, or that we're so out of touch politically and economically that we ought to be embarrassed for even countenancing a submission like this to government. We are not a charity. We should have asked for just $3 million and left it at that - for the ABS stats collection; for doubling the Lit Board grants; and for making author prizes tax free. 


But whatever becomes of it, it does seem that the whole BISG project was worth it, if only to get all parties around the table and bang heads about the current and emerging challenges of our common future.


For there is a great future. No doubt about it. But it's one the industry will have to construct almost entirely on its own. And that's the way it should be.