Books. US educational publishers McGraw-Hill Education and Cengage have agreed an equal terms stock merger expected to complete early in 2020. If approved by the regulators, the merged company will challenge the Pearson market leader, as online competition threatens textbook publishers. The new company, which will be called McGraw Hill, will become the second largest company in the US market.
The two private equity-owned businesses, which have both struggled with a new textbook downturn, are expected to reduce their prices and invest in digital on the back of annual cost savings of up to $300m. The combined $5bn listed company, with revenues of $3.2bn, will have 44,000 textbook titles. But the real promise of the merger is the scope for the huge expansion of the ground-breaking digital platform Cengage Unlimited which was launched this year.
The subscription program charges students $179.99 a year for unlimited access to online textbooks. The potential of this service has been spelled out by reference to the ‘Netflix for textbooks’: “For a flat fee, students get every educational product created by the largest academic publisher in the US, all at their fingertips, on their tablets, computer, or smartphone instantly.” It also enables subscribers to get free rentals of print textbooks, paying just for the shipping. The University of Missouri was reportedly the first to offer this plan to all students in January
Cengage was formerly known as Thomson Learning before a 2007 sale to Apax and KKR private equity. Heavy borrowings and the combination of online texts and textbook rentals led the company to file for bankruptcy in 2013. It emerged the following year with an increased focus on digital. Apollo private equity acquired McGraw-Hill’s education division for $2.4bn in cash in 2013, ending a plan by the publishing group to IPO the division separately from its financial businesses, now known as S & P Global Inc.
Cengage reported recently that the US higher education textbook industry is in a “vicious cycle” of losing business to book rental services. The company made a net loss of $2m on $1.5bn of revenues in 2017-18. In 2018, McGraw-Hill Education reported “total billings” of $1.7bn – and post-interest losses of $160m. With $3.2bn of revenues, the merged business will remain substantially smaller than Pearson, which reported 2018 sales of $5.4bn. Combined revenues should be in the region of $3.2bn with EBITDA of $900m.
The Cengage all-you-can-eat Netflix-like subscription service should set other media companies thinking. Why don’t daily newspaper publishers form partnerships to offer online readers a whole bundle of daily papers for a single subscription price? Once they have (finally…) realised that most people are never again going to pay for news, quality newspaper publishers should realise that those who do pay for an online news brand are their best prospects for yet more. It’s the case for an imaginative bundle of a deal. Go on…