McGraw-Hill Sells Education Unit to Apollo

McGraw-Hill Cos. agreed to sell its education unit to Apollo Global Management LLC for $2.5 billion as Chief Executive Officer Harold “Terry” McGraw III remakes his family’s 124-year-old company around financial services.

The transaction is expected to close by early 2013, the company said today in a statement. It will have a non-cash impairment charge of about $450 million to $550 million in the fourth quarter and use an estimated $1.9 billion in net proceeds to fund share buy backs and debt payments. McGraw-Hill rose 0.4 percent today to $51.89 in New York.

“They got a fair price,” William Bird, an equity analyst at Lazard Capital Markets, said in a telephone interview. “It was consistent with our estimates.”

Following the sale, McGraw Hill Financial, as the new company will be called, will have at its core Standard & Poor’s, the world’s largest credit-rating company. More than a year ago, McGraw-Hill announced plans to split into two businesses, one focused on educational publishing and the other on financial operations.

The company’s shares have gained 34 percent since the September 2011 announcement, compared with a 21.8 percent rise in the Standard & Poor’s 500 index, according to data compiled by Bloomberg. McGraw-Hill has risen 77.3 percent in the last 10 years, compared with the S&P’s 54 percent increase.

Textbooks Cut

Evercore Partners Inc., Goldman Sachs Group Inc., Wachtell Lipton Rosen & Katz LLP and Clifford Chance are advising McGraw-Hill on the transaction. Apollo is getting advice from Credit Suisse Group AG, UBS AG, Bank of Montreal, Paul Weiss Rifkind Wharton & Garrison LLP, and Morgan Lewis & Bockius LLP.

The education business’s sales have shrunk in seven of the past eight quarters as states and cities cut school budgets for textbooks. Apollo, co-founded more than 20 years ago by Leon Black, is buying the division as the industry reinvents how it publishes content.

The unit is “migrating to a more subscription-based business model, which would have more predictable revenues, and could conceivably have better profitability because you could eliminate the manufacturing and inventory costs,” said Peter Appert, an analyst with Piper Jaffray & Co. in San Francisco. “It’s all about figuring out ways to distribute your content and broaden its appeal in the market.” He spoke in an interview before a deal was announced.

The education division reported $2.3 billion in sales last year and publishes in more than 65 languages. McGraw-Hill has weighed a sale or a spinoff of the business since at least last year, when hedge-fund investor Jana Partners LLC proposed a plan for a breakup.

‘Consistently Underperformed’

McGraw-Hill “has consistently underperformed its potential and traded at a sizable discount,” with the education unit creating a “drag” on the company’s value, Jana said in August


“Most investors looking at the pure-play new McGraw-Hill see a business that has higher margins, better returns on capital and stronger free cash flow than the education business does,” Appert said.

McGraw-Hill’s origins date back to 1888, when McGraw’s great-grandfather, James H. McGraw, acquired The American Journal of Railway Appliances, according to the company’s website. More than 20 years later, he merged his book-publishing department with John Hill’s, creating the McGraw-Hill Book Co. In 2009, McGraw-Hill agreed to sell BusinessWeek magazine to Bloomberg LP, the parent of Bloomberg News.

Apollo’s private-equity business had assets under management of about $40 billion as of Sept. 30, according to its website. Private-equity firms frequently buy distressed companies, aiming to reverse their fortunes and make them profitable before reselling them or taking them public.

Cengage Deal

Private-equity firms have made forays into educational publishing before. London-based Apax Partners LLP led a $7.75 billion acquisition of Cengage Learning Inc. from Thomson Reuters Corp. in 2007 with the aim of making the struggling company competitive against potential rivals in digital education such as Apple Inc. Cengage sales, like those at McGraw-Hill, have suffered because of a decrease in college, career and professional school enrollments and lower inventory stocking in bookstores and at online retailers.

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