McGraw-Hill Cos. Inc. has sold its education unit to Apollo Global Management for $2.5-billion (U.S.), completing a restructuring that began more than a year ago and nearly saw the business spun off as a public company.
The sale will turn McGraw-Hill into a more focused financial services company and mark the company’s exit from the education business after nearly a century of textbook publishing. As previously announced, McGraw-Hill will change its name to McGraw-Hill Financial, subject to shareholder approval.
McGraw-Hill Education, however, did not fetch the $3-billion price for which the group had originally hoped, as competitive interest from other private equity firms, including Bain Capital and Apax, waned. Hopes for a lofty valuation were further hit earlier this month, as McGraw-Hill reported an 11 per cent decline in quarterly education revenues.
“This is a necessary realignment,” said Ned May, an analyst with Outsell. “It will allow each to hopefully flourish in a way that they couldn’t together.”
In a twist that suggests Apollo could not find as much debt financing from banks as it hoped, McGraw-Hill will provide 10 per cent of the financing for the deal, lending $250-million at a 8.5 per cent interest rate.
“We were able to secure an attractive outcome and create additional balance sheet flexibility for McGraw-Hill,” said Terry McGraw, chairman and chief executive officer. The group will use the net proceeds of $1.9-billion for share buybacks and “tuck-in” acquisitions, he added.
Apollo will now face the challenge of finding value in a shrinking business. Other standalone education businesses, including Houghton Mifflin Harcourt and Cengage Learning, are struggling as textbook sales fall in the face of diminished state spending on education and the rise of online learning. Pearson, which owns the Financial Times, is the world’s largest seller of print and digital educational materials.
“McGraw-Hill Education has a deep and impassioned management team, and we share their enthusiasm and strategic vision for the business,” said Larry Berg, Apollo senior partner. “We look forward to leveraging the company’s leading portfolio of trusted brands and innovative digital learning solutions to drive growth through the ongoing convergence of education and technology on a global basis.”
McGraw-Hill has been under pressure for more than a year to streamline its businesses, with Jana Partners, the activist hedge fund, advocating for a quartering of the company.
McGraw-Hill, which once owned a diverse portfolio of assets including BusinessWeek, will now focus on its faster-growing financial services products, including the Standard & Poor’s rating agency, Capital IQ and Platts.
McGraw-Hill was advised by Evercore Partners and Goldman Sachs, and Apollo was advised by Credit Suisse, UBS and Bank of Montreal.