Last month, Standard & Poor’s reported that Cengage Learning’s cash flow was “less than adequate” to cover its needs over the next 12 to 18 months. Last week, reports surfaced that Cengage made a bid to purchase McGraw-Hill Education (MHE). So what gives?
As it turns out, buying MHE could be a way for Cengage to increase its revenue, according to the report. The S&P report about Cengage’s cash flow was based on an assumption that future refinancing costs would be too high, with the Reuters article adding that “may be driving Cengage and its private equity owners to consider acquisitions that would boost its cash flow.”
“It wouldn’t be appropriate for us to comment on what McGraw-Hill might or might not do with respect to a sale or spin-off of its education business,” said Cengage CEO Ron Dunn in the Reuters story. “With regards to Cengage Learning, we continue to generate strong cash flows from operations and we are very confident that we can service our debt while continuing to fund our business at appropriate levels as we lead the migration to digital solutions in all our markets.”
Cengage isn’t alone in its interest in MHE. Reuters reports that Bain Capital, Thomas H. Lee Partners, and Apollo Global Management have also placed bids for the firm that could be valued at around $3 billion, according to The Bookseller. Reuters also reports Cengage is looking to make a bid for EmbanetCompass, an online education services company.
McGraw-Hill decided last September to split into two publicly traded companies by the end of 2012 after calls from minority shareholders to restructure the business. MHE earned $2.3 billion in revenues and had an operating income of $260 million last year. Digital-related solutions accounted for more than 20% of its 2011 revenue
As in any business venture, there are risks for Cengage, particularly if its cash flow declines. Consolidating that much debt into one company could also be a concern for the industry, but the potential for reduced store-channel leverage and more direct-to-customer and institutional sales models are also long-term concerns stemming from more consolidated content.
Or the bid could provide Cengage with some breathing room.