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From mega deal to mega debt: Cengage files for bankruptcy protection

Almost six years after private equity groups Omers Capital Partners and Apax Partners completed the $7.75-billion (U.S.) purchase of textbook and educational software business Thomson Learning, the company has filed for bankruptcy protection in New York.

Matthew Sherwood/The Globe and Mail

A golden pre-recession deal for an education company has turned into a tough lesson in the dangers of debt.

Almost six years after private equity groups Omers Capital Partners and Apax Partners completed the $7.75-billion (U.S.) purchase of textbook and educational software business Thomson Learning, the company has filed for bankruptcy protection in New York.

Now known as Cengage Learning Inc., the Stamford, Conn.-based firm plans to wipe out a large chunk of its $5.8-billion debt through its restructuring process.

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Much of that debt stems from the leveraged buyout in 2007, and because this is a prepackaged bankruptcy, creditors have already approved the company's plan to reorganize. The consolidated list of top creditors in the filing includes Thomson Corp. with a claim of $1.5-million, Wells Fargo at $63.6-million and National Geographic Society at $697,231.

"A more appropriately sized capital structure, along with our established product lines, leading market positions and strong customer relationships, will position us well to accelerate our growth and take advantage of business opportunities in the education and research space," said Michael Hansen, Cengage's chief executive officer, in a statement. The company noted that it expects to generate positive cash flow through the period.

Cengage's bonds have fallen by 33 per cent this year, which is a decline greater than "any other borrower with the lowest credit ratings," according to a Bloomberg report last week, which also noted that many millions would soon be coming due. There had been market speculation that the company could turn to restructuring to tackle its unwieldy debt problem.

But back in 2007, the deal market was hot and Omers and Apax were willing to spend millions – even billions – more than analysts predicted to make their purchase. A spokeswoman for Omers declined to comment.

More than 2,000 deals were done that year worth a total of more than $269-billion, as deal makers unknowingly hurtled toward the crash. The sale of Thomson Learning by media giant Thomson Corp. was the second-largest, following Rio Tinto's purchase of Alcan valued at $37.6-billion.

But by the beginning of 2008, analysts and experts were already calling for a softer deal market due to concerns over weakness in the credit market. Soon, the recession would hit.

Cengage did make a few acquisitions in the years following, but it had other headwinds to fight: The way students wanted to use learning materials was changing from paper-based, which accounted for 60 per cent of Cengage revenues in 2007, to digital platforms.

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Now, the company is undergoing a shift from "traditional print models to digital educational and research materials."

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