1. Scholarly Publishers
The commercial publishers covered in the SPARC 2019 Landscape Analysis (INSERT LINK) fared reasonably well in the pandemic.1 Scholarly journal publishers saw a small decline in revenue growth rate, but at a pace that barely affected their profitability. In negotiations with librarians, publishers showed little inclination to help alleviate the difficulties of their customers: most libraries were offered, at best, flat price increases for 2021. Any price cuts were generally linked to relinquishing significant rights (such as perpetual access rights to articles covered in the subscription), with the notable exception of Canadian Research Knowledge Network (CRKN), which demonstrated that it is possible to get a significant price cut from Elsevier without significant corresponding concessions.2
The decision to hold firm on pricing conflicts with the “partnership” that publishers claim to have with academic institutions. In fact, the impact of the pandemic on academic and library budgets has been significant. An Ithaka survey published in December 20203 indicated that 75% of respondents among US academic libraries had experienced cuts. These cuts clustered in three categories (1–4%, 5–9%, and 10–14%) representing in aggregate almost 60% of the libraries, with the final 15% experiencing even deeper cuts.
In part, revenue resilience is a function of the subscription model. In fact, shortly after the beginning of the pandemic, RELX (which is usually referred to as Elsevier) issued guidance on the expected revenue resilience of its science, technical, and medical (STM) business on the grounds that 75% of revenues are subscription based. Early in 2021, Wiley indicated that subscription revenues are indeed affected by “modest pricing pres-sure,” although this pressure is offset by rising OA revenues. Nonetheless, the publishers seem eager to continue privileging their short-term financial performance rather than providing relief when their customers are under stress.
2. Courseware Publishers
Textbook and courseware publishers fared less well, but still better than originally expected. At the beginning of the pandemic, Cengage revealed, for example, that it had prepared contingency plans based on various scenarios and that the most negative one assumed a 25% decline in revenues. Actual results in 2020 were much less dire than this extreme scenario: looking at the three leading US courseware publishers, their total revenue decline across all businesses ranged between –4 and –10%. These declines were particularly severe in other parts of their portfolios, like global assessment for Pearson (which declined by –14%), or K–12 for McGraw Hill (which declined by –11%). The US higher education businesses fared better, with US revenues declining by –12% at Pearson and rising by 5% and 4% respectively at MGH and Cengage.
3. Debt, Cash, and Equity
The 2020 Update: SPARC Landscape Analysis & Roadmap for Action (INSERT LINK) observed that cash conservation, access to liquidity and capital markets, and levels of debt of different vendors could become important drivers of what these companies would be able to do in the years to come. One year later, these concerns have fallen to the wayside—at least for now.
Cost of Debt
Because of their high levels of debt, the situation of MGH and Cengage is notably different from that of other companies. At the time of the June 2020 update, S&P rated both McGraw Hill and Cengage CCC (seven notches below investment grade). Unsurprisingly, the yields on the two companies’ bonds spiked in the aftermath of the failed merger.
In mid-February 2020, before the pandemic started to affect the financial markets, the yields on McGraw Hill Education and Cengage bonds stood at about 9% and 10%, respectively. As of March 2020, when the pandemic had been factored in by financial markets, but the merger had not yet failed, yields stood at 15.3% and 18.5% for McGraw Hill and Cengage. By early May 2020, after the merger was abandoned, yields had risen to 29% and 37%, respectively, to then decrease again as financial markets recovered. As of July 9, 2021, yields on McGraw Hill Education and Cengage stood at about 5.75% and 9% respectively, broadly in line with the 6.5% average yield for CCC and lower-rated bonds (i.e., defaulted) in US dollars at the same date.
In part, this is due to the strong reaction by monetary and—to some extent—fiscal authorities. Central banks have responded to the pandemic by substantially expanding their monetary policy. Large purchases of both government and corporate bonds have injected substantial amounts of liquidity into the economies of both the US and many European countries, contributing to lowering (or, in the case of Eurozone countries, maintaining) low interest rates. In addition, many countries have seen or are expected to provide substantial support to their economies through aggressive fiscal policies. The initial shock was significant: the VIX index, which measures the expected volatility of US financial markets,4 spiked in March 2020, when it reached levels last seen in October 2008, at the height of the financial crisis triggered by subprime loans. Since then, the index has steadily declined (with some corrections associated with political uncertainty), as both monetary and fiscal policy have been adjusted to fight the economic impact of the recession.
All the companies highlighted in the 2020 Update: SPARC Landscape Analysis & Roadmap for Action (INSERT LINK) launched cash conservation and cost-cutting programs. The financial actions ranged from suspending stock buybacks to securing additional lines of credit or refinancing bonds and credit facilities to extend their maturity into a further future, as well as taking advantage of lower interest rates. Both Pearson and RELX suspended stock buybacks in 2020, and virtually all companies launched significant cost-cutting programs aimed at either permanently lowering their cost base, postponing some expenditures until later in 2020 and into 2021, or both.
Every company secured additional lines of credit, and the ones that had debt nearing maturity renegotiated their facilities both to take advantage of low interest rates and to extend maturities. In general, courseware publishers took stronger action to reduce lever-age and conserve or add cash to their balance sheets than did companies like RELX and Wiley that are less dependent on actual student enrollment (Exhibit 2). It is important to underscore that, in addition to cash at hand, all these companies have access to lines of credit which they can use to draw down additional cash as needed. For example, Pearson had on December 31, 2020, almost £1.1 billion (US$1.5 billion) in cash and cash equiv-alents at hand, but it reported total liquidity (which would typically include these credit facilities) of £1.9 billion (US$2.6 billion).
In June 2020, Springer Nature Group (SNG) had just failed to list itself on the Frankfurt Stock Exchange through an Initial Public Offering (IPO) in the spring of the year, because the financial markets went into a deep dive as the pandemic came to dominate the headlines. The company attempted an IPO again in the early Fall of 2020 and it failed again, as the markets corrected downwards again, this time as the second wave of the pandemic hit the Northern Hemisphere. At the time of publication of this report, however, markets have recovered and have reached new highs, and yet the IPO has not been resurrected—which suggests more fundamental concerns in the financial markets about the long-term value and sustainability of the business.
A little-noticed article published in the Financial Times in December 2020 indicated that BC Partners was entertaining the option of selling its stake in SNG to a new fund controlled by BC Partners itself,5 and more details emerged in March 2021 on Bloomberg.6 The sale was finally announced officially on June 10, 2021. There are sound reasons for what may appear a bizarre action. Private Equity’s (PE) strategy is to resell stakes in the several businesses that are held in a fund—either through an IPO or an outright sale. If selling one or more businesses becomes impossible, most fund rules allow the PE company to distribute the shares in any company that has not sold to the investors. Investors, however, have no desire to hold a small number of shares in a company that fails to find a buyer, and a distribution of shares is viewed as a negative mark on the performance of a PE investor. Hence, BC Partners chose to raise additional funds in a new Single Asset Acquisition Fund from other investors led by asset manager Neuberger Berman (as well as from itself) and acquire the SNG from itself. In this way, investors in the BC Partners fund that previously held the SNG stake can receive the proceeds of the sale, while BC Partners (alongside the new investors) can hope it will be able to finally sell the stake at a later stage.
Historically, the academic community—SPARC included—has viewed with some satis-faction the repeated failures of SNG to go public. However, this satisfaction should be tempered by additional considerations. The first is that the funding deriving from the sale of shares to institutional investors would allow SNG to reduce its debt. In turn, if SNG had a lower debt burden, the company could expand into data analytics in a way it has not been able to do. (In fact, Digital Science remains a separate business owned directly by Holtzbrinck, the largest shareholder in SNG). The conflict of interest between the publishing activities and the data analytics business of Elsevier remains a significant concern, and though launching SNG into data analytics would pose the same issues, it would also allow mounting a direct competitive effort that could limit the competitive position of Elsevier.
In June 2021, Apollo Global Management (the PE company that acquired the educa-tion business from McGraw Hill in 2012) sold the company to Platinum Equity (another private equity company) for $4.5 billion. The valuation was possibly lower than Apollo had hoped for: an article published by Bloomberg in March 2021 indicated that Apollo was considering a sale of the company at a valuation (including the value of debt) of $5- to $6 billion.7
Finding a buyer for McGraw Hill proved more difficult than Apollo may have originally expected. Repeated attempts at an IPO failed, the proposed merger with Cengage failed when the US Department of Justice and United Kingdom regulators demanded onerous remedies, and a strategic buyer from outside the courseware industry did not emerge. Press releases were vague about the terms of the deal, and in particular they did not indicate whether the $4.5 billion valuation included the debt of the company ($1.765 billion on March 31, 2021). Depending on whether debt was included, the valuation was either a prudent 10.2x or an expensive 14.2x EBITDA.
EBITDA refers to earnings before interest, taxes, depreciation, and amortization.
MGH’s net debt/EBITDA has been lowered from 7.1x to 4.0x in two years, but that still leaves little room to add sufficient addi-tional debt to boost equity returns and—after almost 10 years under the ownership of Apollo—additional cost savings are likely to be modest. Platinum Equity, therefore, faces some challenges in adding value to its investment. Since the debt will be refinanced, Platinum does have the option of raising again the debt of MGH to levels seen in the past (although that could be a risky move in light of fears that interest rates will rise to tame a possible return to inflation). Alternatively, MGH could embark on a series of technology acquisitions aimed at adding revenues and improve competitiveness in the core higher education market.
Net debt/EBITDA ratio indicates a company’s ability to pay off its debt. The lower the ratio, the higher the ability of a firm to pay off its debt. Many analysts consider ratios lower than 3 acceptable and higher than 4 a possible indicator of future distress.
[Details about the financial performance are contained in Appendix I] ↩
[The VIX index measures expected market volatility (i.e., the expectation that prices can change up or down dramatically in a short period) and is calculated from the prices of options on the S&P 500 for the following 30 days. The VIX index, which was created by the Chicago Board of Trade, started trading in March 2004, but its performance has been back calculated and is commonly available since 1990. In general, spikes in the index are associated with recessions, although the predictive power of the VIX has been questioned.] ↩