Following Footsteps In The Wrong Direction

As Barry O'Callaghan swallowed more educational publishing material debt than he could digest, so too did Cengage match him deal for deal, all in an effort to keep pace.

Keep pace Cengage did.

Except the pace they kept has brought them to the same place as the old Education Media and Publishing Group. Cengage is looking at a massive restructuring to deal with a fatal dose of debt with the interest about to come due. a repeat of the demise of Mr. O'Callaghan's empire.

Not that there is no interest among investors in forming a mighty conglomerate. The same hedge fund that bought up McGraw Hill Education is now buying Cengage's commercial paper. Apollo Global Management sees the possibilities in such a merger as Mr. O'Callaghan once envisioned. They intend to do it on the cheap, which is always the best way to buy something for investment.

Like EMPG's sad story, Cengage is falling from a decline in textbook sales that is linked to the current economic decline. Schools are as strapped for cash as the parents who support them, and textbook purchases have been cut drastically.

What looked good in 2008 is now proving to be a very wrong path for a firm to be on, and Cengage is trying to steer a new course to avoid disaster.

Apollo would like to pick up Cengage at a discount, and then realize all the more synergies by merging it with McGraw-Hill, creating a massive educational publishing materials behemoth that would take it to what's left of O'Callaghan's dream at HMH.

There are no guarantees that such a deal would take place, of course. Given that mass lay-offs would surely ensue (call it synergies realized if you like but the U.S. Congressional Republicans won't), and there would be little appetite in Washington, D.C., for that sort of news on the job front.

Anti-trust questions come into play, particularly in light of what was permitted when little Riverdeep Publishing swallowed up a few publishing whales. What did not work then, and has not worked for Cengage, would not appear to be so harmless a merger after all.

Cengage would like to restructure its debt to take the heat off and buy some time, in the hope that the educational publishing market shows improvement. Investors buying up the bonds at a discount would prefer to merge with McGraw-Hill to ensure a better return.

The people who keep Cengage running, the sales staff and the editors and the administrative assistants, would just like to keep their jobs. Their odds are probably worse than the likelihood of Cengage convincing its bondholders that a restructuring is in everyone's best interest, especially with Apollo holding so many of those bonds.