McGraw-Hill sells education unit

January 2013 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

McGraw-Hill Companies has completed the final stage of a year-long restructuring operation by agreeing to sell off its education unit, McGraw-Hill Education, for $2.5bn.

On 26 November it was announced that private equity firm Apollo Global Management had entered into a definitive agreement to purchase the unit, subject to regulatory approval. McGraw-Hill expects the deal to be completed in late 2012 or early 2013. According to a company press release, McGraw-Hill will be providing 10 percent of funding for the deal. Apollo will issue the company $250m in unsecured notes, at an annual interest rate of 8.5 percent.

Subject to shareholder approval, McGraw-Hill will undergo a rebranding to reflect the new direction of the company. The newly re-christened McGraw Hill Financial will turn its back on textbook publishing, an industry it has been involved with for nearly 100 years, and will instead focus on the fast-growing financial services sector.

McGraw-Hill has been looking to offload the educational arm of the company since around September 2011 and has held negotiations with a number of interested parties, including private equity firms Bain Capital and Apax Partners. McGraw-Hill had, at one point, hoped to generate $3bn through the sale of its education unit, but interest in the division waned as the textbook industry continued to struggle.

Harold McGraw III, chairman, president and chief executive officer of McGraw-Hill said “After carefully considering all of the options for creating shareholder value, the McGraw-Hill Board of Directors concluded that this agreement generates the best value and certainty for our shareholders and will most favourably position the world-class assets of McGraw-Hill Education for long-term success. We were able to secure an attractive outcome and create additional balance sheet flexibility for McGraw Hill Financial.”

McGraw-Hill’s portfolio of brands in the financial sector is particularly strong, with Standard & Poor’s, Platts, and JD Power and Associates all coming under the McGraw-Hill Financial umbrella. McGraw-Hill Financial forecasts revenue of $4.4bn for 2012. The company intends to use the approximate net proceeds of the sale – totalling¬ $1.9bn – to continue its share buyback scheme and to complete ‘tuck-in’ acquisitions which will complement its existing portfolio of brands. The new company will employ around 17,000 people in over 30 countries worldwide.

McGraw-Hill’s decision to sell the unit at a reduced price is another indicator of the difficult transitional period the education business is currently enduring in the US. As pre-college state spending on education drops across the country and the proliferation of digital textbooks and online educational sources continues unabated, sales of conventional textbooks continue to fall.

Q3 2012 saw McGraw-Hill Education generate $836m in revenue, down 11 percent on Q3 2011. Furthermore, the unit’s operating profit dropped 20 percent to $253m. Fellow textbook manufacturers Houghton Mifflin Harcourt and Cengage Learning have also felt the impact of dwindling textbook sales; Houghton Mifflin underwent its own restructuring program in mid-2012. In November Cengage reported a 22 percent fall in revenues and a 49 percent drop in operating income for the first quarter of its financial year. Clearly, businesses in the industry need to find new ways in which to be profitable.

Apollo will seek to modernise its new asset once the sale has been completed. “We look forward to leveraging the company’s leading portfolio of trusted brands and innovative digital solutions to drive through the ongoing convergence of education and technology on a global basis,” said Larry Berg, senior partner at the firm.

Richard Summerfield