Posted on Wednesday 28th November 2012 11:51
Another week, another publishing takeover. Yesterday McGraw Hill announced that it was offloading its education publishing business, though this time not to another publisher. The Private equity arm of investment firm Apollo Global Management will take control of the textbook publisher, which has undershot its revenue targets in 7 of the last 8 quarters and has been on the market for a year.
Apollo’s decision to invest nearly $2.5 billion in the company is a signal that the money men believe there’s still a lot of profit to be made from educational publishing. What’s less clear, however, is whether Apollo’s vision for its acquisition is in line with its current management’s thinking. McGraw Hill has openly acknowledged that educational publishing is in the period of transition, and its management have been furiously seeking to reposition the company as “Netflix for textbooks”. They’re betting heavily on subscription-based access to textbooks and learning materials providing a more consistent stream of revenue than the present business model, which is shrinking as schools and colleges cut their budgets.
Buying an educational publisher is something of a departure for Apollo (BPP and some universities in the Americas to one side), which is best known in the UK for its investment in the high-street fashion brand Claire’s Accessories. Its other principal private equity investments include companies in chemical, electronics and component manufacturing, which shed little light into what Apollo’s plans for its new buy. What we can confidently expect though is a renewed focus on profit for McGraw Hill’s former education publishing activities. As private equity buy-outs are frequently highly leveraged, bought-out companies must service it through cutting their costs and returning higher profits. And to give some idea of the level of returns an Apollo acquisition needs to deliver look no further than the $250million of company debt that Apollo has agreed to pay McGraw Hill to complete the transaction. These command an annual interest rate of 8.5%.
This challenge, when set against McGraw Hill’s recent financial statements (its most recent quarterly earnings posted an 11% dip in revenue and 20% slide in profits for the educational publishing division) underline the scale of the task in hand. Nor are the signs elsewhere in the sector particularly encouraging. Cengage the US’s number two textbook publisher was acquired by two private equity houses, APAX and (due to the required Canadian involvement) Omers in 2007 and has also seen profits and earnings slide, highlighted in the latest Q1 results. One wonders whether Cengage’s rumoured interest in acquiring McGraw Hill for itself may have been a distraction that impacted this very performance.
What we may well see here over the coming months and years is a clash of wills between the ideas men and the money men. The technology and publishing evangelists might indeed push through a new vision for education publishing? Will they secure the investment they need to break the textbook paradigm and establish a nice, steady stream of subscription income for Apollo? As a long-term vision it’s a tantalising one. There are more than a few textbook publishers who believe a journal-style subscription model could be the saviours of their businesses. On the other hand, establishing a new business model takes time and money – and maybe too much money for a private equity house that needs to stay focused on engineering profit in order to keep its own investors happy.
It’s much too early to tell how this deal will pan out, but in a market where upstart companies like Boundless and even Apple are all clamouring to disrupt the formerly cosy textbook business it’s safe to say that it will be interesting. We just have to hope that at least one of the textbook giants has the nerve, the cash and the right backing to see it through the great digital disruption.