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.
