Private equity firms are going to have their work cut out for them, if Jana Partners and the Ontario Teachers’ Pension Plan get their way. The pension and the hedge fund teamed to buy a stake in recent market benchmark under-performer and multi-faceted education and financial services publishing giant McGraw-Hill and decide that the company could best serve its shareholders by selling off some of its parts. They’ve got a good argument, or at least that’s how the market feels. Executives at McGraw-Hill would rather be left alone, it would appear.
Regardless of whether those executives are ready for it, the education business—which, in McGraw-Hill’s case, accounts for about a third of the company’s revenue—is going to get the same treatment the print media and music businesses got over the last decade, courtesy of the Internet. (Improved online storage capacity and the advent of the tablet will help.) That is to say, failure to keep pace with industry changes could turn McGraw-Hill’s textbook segment into another bad adventure in the print business.
With competitors like Chegg and CollegeTextbookRentals.com, McGraw-Hill will have to compete against a better-established secondary market in the near term and see a diminished need for shiny, brand new textbooks. Over the long-term, much of the content McGraw-Hill puts onto dead trees will be presented instead via an electronic device. The changes first will come from college students. When price points on tablets have been reduced to the point that every elementary school student has one, the same can be said of the company’s broad K-12 publishing segment. At least McGraw-Hill—or whoever runs the company’s current education portfolio—will be able to save on production and shipping costs when trees are no longer utilized in the publishing business.
If McGraw-Hill plans to exit the education business, it is likely some of the biggest private equity firms in the country will take notice.
One potential candidate is KKR’s Weld North, headed by former Kaplan chief Jonathan Grayer. The PE firm and its platform developer reportedly combed 350 potential targets before striking a deal earlier this year with Education2020, an Arizona software firm. Clearly, Grayer means to get further away from print, and perhaps he could improve operations at any of the five separate businesses under the McGraw-Hill education segment. Don’t count out Providence Equity Partners, either. They are certainly hatching strategies to improve their most recent billion dollar buy of international education company Blackboard Inc. And middle market private equity firm LLR Partners is another potential buyer of smaller assets. Finally, don’t count out OTPP itself—the pension fund has found its way into numerous big investments this and last year.
McGraw-Hill’s media operations (excluding its financial services pubs, which, like its S&P and data businesses, are core) could prove another PE target. They certainly don’t generate as much as the company’s education operations. But the broadcasting division, a batch of loosely-affiliated local TV stations, could find a PE suitor, though not many strategics out there are looking to gain weight.
Other print and online media covers aviation, construction, energy (Platts), and market research (J.D. Power). Look at it from any angle, it’s tough to see synergies between individual products here.
McGraw-Hill’s ancillary businesses will be reshaped in coming years by earth-moving market forces. The company should look into monetizing worthwhile assets before they have another BusinessWeek on their hands.