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People in masks walk past the University of Toronto bookstore, in Toronto, on May, 25, 2020.

Christopher Katsarov/The Globe and Mail

Canada’s largest education publisher, Nelson Education Ltd., has agreed to sell its domestic university textbook publishing business to Toronto technology company Tophatmonocle Corp. in a deal that heralds a hastening of the shift to online education here.

The deal - believed to be worth under US$30-million - plus another impending agreement to transfer its business distributing post-secondary textbooks domestically from foreign publishers to another buyer will leave Nelson focused entirely on the kindergarten to Grade 12 market, as it tries to push more of its content through its Edwin online learning platform Edwin.

“We believe in the transformational power of education and the role it plays in building a stronger society and in turn an effect on gross domestic product for our country. That is why focusing on engaging students in K-12 education will result in better post-secondary preparedness and future workforce readiness,” Nelson president and CEO Steve Brown, said in a release Tuesday. “Enabling student and educator success is at the core of everything we do. As post-secondary institutions prepare for the upcoming school year, we want to ensure faculties and their students have access to high quality and flexible content in premium online courseware for a new learning environment brought on by a global pandemic.”

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Meanwhile, the deal will vault Tophatmonocle (known as Top Hat) into the ranks of top North American college textbook publishers, with a plan to quickly convert most sales of the 400 of Nelson’s Canadian titles it is acquiring to digital formats available on its mobile platform.

“You can think of this almost as a changing of the guard within higher education,” said Mike Silagadze, chief executive of Top Hat. “In one swoop, the largest player has effectively become a technology company.”

He said he doubts there will be much of a print business left by 2023 at the end of a contract that sees Nelson continue to manage physical book printing and distribution for Top Hat. By then, he said, “physical books will be weird and students will wonder what you’re doing if you’re assigning a physical book and charging $200 for it.”

Mr. Silagadze co-founded Top Hat in 2009 with a plan to build the “iTunes for higher education content,” said Shawn Abbott, a partner with Inovia Capital, one of the company’s backers. The founder believed textbook publishing was ripe for the same kind of disruption as the music industry experienced when online services such as Napster enabled widespread pirating, meeting fierce resistance from established players who were slow to embrace digital distribution.

Similar dynamics have played out in publishing. Since 2007, prices for new textbooks in the U.S. have risen at a much faster pace than used versions while students spend less on course materials, according to the U.S. Association of College Stores. Publishers including Pearson Plc have seen sales and profits stagnate. “I think all the players in the publishing industry are hurting because of declining sales and the mismatch between the product they offer and what the customers expect,” Mr. Abbott said.

Top Hat initially offered to digitize large publishers’ textbooks for them, but they only wanted PDF versions for which they charged full prices. “They were never successful, they created a terrible user experience, so we stopped selling that product. It was a ripoff,” Mr. Silagadze said.

Top Hat instead marketed its platform as a way for professors to publish their own textbooks for use by students on their mobile devices, adding interactive, web-based features including videos. Top Hat made the content available to others, offering authors a higher cut while charging students less than industry norms.

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By this year, professors had published hundreds of texts on Top Hat. Combined with the ability to administer tests and assignments and provide feedback, Top Hat’s platform proved popular and was used by millions of students at 750 postsecondary schools in the past year. During the pandemic, it has expanded its offering and will enable professors to teach classes over its platform this fall.

Mr. Silagadze believed Top Hat could grow faster – and overcome resistant faculty who preferred familiar texts – by buying or licensing titles from struggling publishers and turning them into online versions. He struck a handful of such deals in the past two years, raising US$55-million for more acquisitions weeks before Nelson called to sell, and has seen customers convert from print to digital versions at a faster rate than expected this year. "This is an example of a company that is hyper-accelerating because of COVID-19,” said Top Hat investor Michael Hyatt. “The digital transformation that was going to take a decade will happen in one year.”

For Nelson, the deal is the latest step in a wrenching journey that began in 2007, when Thomson Corp. sold its parent company to Apax Partners LP and the Ontario Municipal Employees Retirement System at the height of the leveraged buyout boom for US$7.75-billion.

Nelson, founded in 1914 and purchased by Thomson in 1962, was split off as an OMERS-controlled entity focused on Canada. But it struggled under a heavy debt load and filed for creditor protection in May, 2015, with lenders taking control.

Since then Nelson has signed a slew of Canadian distribution deals with foreign publishers, purchased McGraw-Hill Ryerson’s kindergarten-through-Grade 12 educational materials business and bought a digital startup in 2017 it has used to offer its teaching materials online.

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