- Last Updated: 12:09 AM, December 1, 2012
- Posted: 12:09 AM, December 1, 2012
Apollo Global Management could end up schooling the private-equity industry in how to profit from the education publishing business.
The buyout giant, controlled by Leon Black, agreed this week to pay $2.5 billion for McGraw-Hill’s education business, which has posted declining sales in seven of the last eight quarters.
At the same time, Apollo also has a significant debt position in cash-strapped Cengage Learning, sources told The Post.
The second-largest college textbook publisher, which was bought by PE firms Apax Partners and OMERS Capital Partners for $7.7 billion in 2007, is expected to trip its loan covenants by 2013 or 2014, at the latest.
If that happens, Apollo’s plan is to repossess Cengage, combine it with McGraw-Hill Education and significantly cut costs, according to a source.
PE firms usually avoid acquiring declining businesses through leveraged buyouts because they saddle already troubled companies with more debt.
Apollo and Apax declined comment.
Pearson is the leader in the US higher learning market, and controls more than a third of the market. Cengage’s share is in the low 20s, while McGraw-Hill’s is in the high teens.
While Apollo may be interested in combining Cengage and McGraw-Hill, it is not essential to its business plan, according to a source close to the firm.
Apollo believes producing higher education materials in digital formats will ultimately increase profits as well as cut costs at McGraw-Hill Education.
Apollo also hopes to make inroads in the digital market for textbooks, although there are significant challenges.
Students now buy textbooks at high prices and then re-sell them at used book stores. Publishers make nothing off the secondary market.
Educational publishers for several years have been pushing schools to order digital textbooks, arguing that they can lead to lower initial book prices.
For publishers, even selling them at a lower cost would result in more sales and higher profits, the source said.
Apollo has placed little value on McGraw-Hill’s K-12 business, representing 30 percent of its revenue, given that state budgets are stretched.
It is also unclear whether traditional publishers will be the ones to make the most inroads in the digital domain.