Apax & Apollo Emerge As Top Bidders For McGraw Hill Education

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Among the private equity firms interested in acquiring the education unit of The McGraw Hill Companies, Inc. (NYSE:MHP), Apax Partners and Apollo Global Management (NYSE:APO) came out as the top competitors, after the deadline for the bidding process on Thursday.

Apax & Apollo Emerge As Top Bidders For McGraw Hill Education

Apax and Apollo submitted a serious and thorough proposal to acquire McGraw-Hill Education, according to sources knowledgeable about the auction. Other interested parties might still submit their proposal, such as Bain Capital, which was reportedly preparing its final bid.

Apax is the majority shareholder of Cencage Learning Inc.; the second largest textbook publisher in the United States. Apax and OMERS Capital bought Cencage from Thomson Reuters Corp (TO:TRI) (NYSE:TRI) for approximately $7.75 billion in 2007.

McGraw Hill Companies, Inc. (NYSE:MHP) aims to sell McGraw-Hill Education for $3 billion. In September of last year, the company announced to divest its education unit from its financial services business. The company’s plan is to establish Mc-Graw Hill Education as a separate publicly traded company.

McGraw Hill Companies, Inc. (NYSE:MHP) initiated the auction process as an option for its divestiture plan. People familiar with the auction said, the company might change its decision to sell its education business, if the offers are below its expectation. The company is expected to render its decision by the end of the year.

McGraw-Hill Education is the world’s second largest education company by sales. In 2011, its revenue was $2.3 billion, and its operating income was $260 million. The company generates 20 percent of its revenue from digital related products, and 18 percent of its revenue comes from international operations. McGraw-Hill Education sells texts in 65 languages, across 157 countries, around the world.

The minority shareholders of McGraw-Hill Companies (NYSE:MHP), Jana Partners and Ontario Teachers’ Pension Plan, encouraged the company to restructure its education business.

Barclays believes that  MHED would be worth close to $2 billion as a stand alone company. Their reasoning is that MHED trading at ~6x ‘12E EBITDA (~$2.4B value), but a takeout could be as high as 7-8x ($2.8B-$3.2B). Given the challenges in the industry (poor state budgets, question marks on the shift to digital, growing rental market), they think a sale would be ideal for not only MHED but MHP as well (i.e. use net proceeds to buy back shares and/or increase dividend). Finally, given the large amount of M&A by MHED , the tax basis ($1B-$2B) is likely high enough to warrant considering a sale.

The stock value of McGraw Hill Companies (NYSE:MHP) is up by almost 2 percent to $55.93 per share in Friday afternoo trading at the New York Stock Exchange.


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