By Cara Lombardo
McGraw-Hill and Cengage plan to merge in a deal that would create the second-largest provider of college textbooks and other higher-education materials in the country.
The closely held companies, formally known as McGraw-Hill Education Inc. and Cengage Learning Holdings II Inc., are billing the all-stock deal as a rare merger of equals, which would set them up to better compete as the rise of digital books and course materials pressures their businesses.
The deal, should it pass muster with regulators, would create a new company with roughly $3.16 billion in annual revenue, McGraw-Hill and Cengage's chief executives said in an interview Tuesday. The new company is to be called McGraw Hill and will be led by Cengage CEO Michael Hansen.
Based on revenue multiples of publicly traded rivals, it could be valued at around $5 billion, trailing the roughly $8.5 billion market capitalization of London-based Pearson PLC, the biggest player in the U.S. higher-education market.
The deal comes as textbook publishers are adjusting to a changing educational landscape in which low-cost alternatives are often available online. About half of both companies' sales still come from traditional print textbooks, while the rest is from digital books and class materials such as online homework assignments, and combining could help them make much-needed cost reductions.
McGraw-Hill and Cengage expect their merger to yield $300 million of total cost savings over the next three years that they plan to use to expand digital offerings and lower prices. "We want to make the experience radically more affordable," Mr. Hansen said,in the interview foreshadowing what is likely to be an argument as to why regulators should sign off on a union. of the rivals. McGraw-Hill CEO Nana Banerjee will leave after a transition. The combined company's leadership is expected to include executives from both firms, which are both private-equity owned.
The combined company will have 44,000 textbook titles as well as digital platforms including a subscription program recently launched by Cengage that allows college students to pay a fee each semester for unlimited use of online textbooks and other materials.
Boston-based Cengage reported preliminary 2018 revenue of roughly $1.5 billion, while New York-based McGraw-Hill had revenue of about $1.6 billion.
Cengage was known as Thomson Learning before a 2007 sale to a group of private-equity firms including Apax Partners LLP. A heavy debt load combined with increasing use of online texts and the popularity of textbook rentals led the company to file for bankruptcy in 2013. It emerged the following year with an increased focus on its digital business.In addition to Apax, Cengage is backed by private-equity firms KKR & Co. and Searchlight Capital Partners LP.
Apollo Global Management LLC agreed to buy McGraw-Hill Cos.' education division in 2012, ending a plan by the publishing giant to take the unit public as part of splitting its textbook business from its financial businesses, now known as S&P Global Inc. Apax, which was the majority owner of Cengage at the time, had also bid on the business.
The current deal came together in the past few months after Messrs. Hansen and Banerjee arranged to meet at a conference.
Should the deal close and go according to plan, the combined company could ultimately go public or give its backers another way to exit their investments in the next few years, Mr. Banerjee said.
Write to Cara Lombardo at email@example.com