McGraw-Hill Education Signals Plans to Become Public Company

Associate Editor

McGraw-Hill Education Inc. filed paperwork Friday signaling its plans to become a publicly traded company, confirming speculation that it would make the move.

Reuters reports that the company’s potential value could be $5 billion to $6 billion when the initial public offering is made sometime later this year. Its owner, Apollo Global Management LLC, a private equity firm, paid $2.5 billion for the company in 2013.

In McGraw-Hill Education’s Form S-1, registered with the U.S. Securities and Exchange Commission, the company officially announced its intention to offer common stock, and explained both the risks and opportunities in its potential value to investors. In that prospectus, McGraw-Hill—which will use the symbol MHED—covered several specific topics:

Investment in digital adaptive learning: The company’s “Digital Platform Group” grew to $150 million in 2014, an increase from $90 million in 2012. This year, McGraw-Hill expects to invest more than $175 million in that segment of its business. 

Acquisitions to strengthen its position: By spending more than $200 million to acquire ALEKS, a digital adaptive learning solution originally developed for K-12 math, LearnSmart, which is used in higher education, and Engrade, a learning management system, the company said it has “significantly strengthened” its platform and adaptive digital offerings.

Savings from digital: The company indicated that it has generated $1.5 billion from 2012 to 2014. With more revenue coming from digital products, it has been able to save on pre-publication and capital expenditures, and has required less working capital, allowing it to make the acquisitions mentioned above, among others.

International focus: The company plans to adapt its portfolio of English-language content and digital products to meet “local market needs,” citing the intention to “rapidly scale our presence in international markets, with particular focus on emerging markets in Latin America, the Middle East, Africa, and Asia Pacific.” 

Balance of education business: In the current slow recovery, the company noted that “the K-12 market is benefiting from increased state and local government spending while higher education enrollment has begun to slow.” McGraw-Hill Education indicated that in 2014, 45 percent of its revenues were from higher education, balancing the cyclical nature of K-12 procurement. 

Discontinued CTB testing business: The sale of the company’s CTB assessment business to Data Recognition Corp. in June came after a net loss in 2014 of $32.5 million, which was partially attributed to contract expirations and non-renewal, and “the slow and uneven state adoptions” of common-core assessments, negatively impacting the market and the number of new business opportunities.

Competition: The company faces competition from large, established companies like Houghton Mifflin Harcourt and Pearson, which are both public companies, and from new entrants to the marketplace. McGraw-Hill’s approximate $1.5 billion in debt could make it less nimble in adapting to new or emerging technologies and changes in cusotmer requirements. 

Other risks include the fact that new products and distribution channels might not be profitable, funding cutbacks might occur at federal, state, or local levels, and the possibility that the company won’t win significant contracts in the staggered state adoption cycles for K-12 instructional materials. Besides that, state changes to common-core standards—or delays in their implementation—may adversely affect the company’s K-12 business.

Defining risks and opportunities in this manner is a requirement of the S-1 registration, so that potential investors can decide how much they value the company. Investors themselves will have an opportunity to consider the offering when it is officially made available later this year.

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