K-12: Have you noticed a pick-up in M&A activity recently compared to prior years?
Rosen: Yes. I track the education/reference publishing areas as a whole. The actual number of deals we count is down a bit. We had 24 deals in the first half of 2004, and this year we had 19 in the first half. But the dollar value of the deals is significantly higher, mainly because of the purchase of School Specialty by Bain Capital. That transaction put the total value in excess of $2 billion, vs. last year's $830 million for the first half. Of that $2 billion total, the main deal was $1.5 billion.
K-12: What do you make of what School Specialty has been up to?
Rosen: It's really a question of what Bain Capital has been up to. Bain has proven before its interest in educational publishing with the acquisition of Houghton Mifflin. It continued to scout the educational publishing field and found School Specialty in its sites. Bain examined School Specialty and determined that it could be bought at a good value based on the kinds of returns it was achieving. I'm sure they've applied significant leverage to the purchase. Interest rates are reasonable, so they managed to be able to pay a premium for School Specialty.
K-12: I've heard School Specialty people say their intention was to become the biggest supplemental publisher in the U.S. Is that the path this company is likely to continue on?
Rosen: That would be a tough challenge for School Specialty to accomplish. It won't be able to do that without picking up some major player.
K-12: Did you find it strange that School Specialty, while being bought by Bain, was able to acquire Delta Education?
Rosen: It surprised a lot of people, because many thought that when a company is being acquired all its resources and time are spent looking inward. But Bain wanted to buy an ongoing business and not something frozen in a point of time. So when the opportunity to buy Delta presented itself, Bain like what it saw and wanted to grow School Specialty. They're only buying it to grow the business. It appears that the purchase is being done almost entirely with debt. So Bain was able to extract good terms from the bank and pay more because it was not putting up equity.
K-12: Do you see any possibility of School Specialty being combined with Houghton Mifflin into a massive education company?
Rosen: The investments in these properties were made from two separate funds, so they represent two separate investments by Bain. However, given that it's all under on roof, it's possible that they could negotiate something where the supplemental publishing was combined with Houghton Mifflin. Or it's possible that the two businesses in their entirety could be combined.
K-12: Let me ask you about ProQuest, which acquired Voyager Learning. What do you make of its foray into K-12?
Rosen: You have at the helm Alan Aldworth, who helped to build Tribune's supplemental publishing business into a sizable entity. So he knows how to do that and is bringing the same experience and background to apply to ProQuest, helping them expand along a similar path. He has assembled a good management team that understands how to implement the strategies he wants to see put into place.
K-12: Did ProQuest pay a high multiple for Voyager Learning?
Rosen: Yes. Clearly, it must have come up with an evaluation based on its anticipation of solid growth for Voyager.
K-12: Tribune made a long string of acquisitions in building up its supplemental business. Would you expect ProQuest to be active and continue to buy?
Rosen: Yes. In fact, I'm surprised that they haven't done more deals this year beyond the Explore Learning acquisition.
K-12: Pearson Education, the largest K-12 publisher, has continued to make acquisitions. They made some small deals culminating in the purchase of American Guidance Service from WRC Media. What did that say to you?
Rosen: Pearson has always been an active and strong buyer, and the fact that they picked up AGS isn't a surprise. They have deep resources and are committed to K-12 in the long term. Pearson is one of the strongest buyers in the school market.
K-12: What does the sale of AGS to Pearson suggest about WRC Media?
Rosen: WRC has had a lot of problems with its other businesses. It needed a significant liquidity event for some of its private equity investors, who have wanted to get value from at least one piece of WRC while the others get by on life support.
K-12: Haights Cross made a couple of acquisitions recently. How much more do you think they are going to do in the M&A area?
Rosen: They are actively looking at transactions and are a more disciplined bidder than some of the other players. They would not have paid what School Specialty paid for Delta, nor for what Pearson paid for AGS or ProQuest for Voyager.
K-12: Does Haights Cross have any particular focus or is it looking for whatever is the best value it can snap up?
Rosen: The focus is more K-8 supplemental and perhaps going up into the middle school level.
K-12: The $50 million purchase of Option Publishing was a big deal by Haights Cross's standards, wasn't it?
Rosen: Yes. But when you look at the growth Options Publishing has had, it is rapid, and the company is a highly profitable supplemental organization. So while the price may have seemed high at first glance, it was well deserved when you actually look at the business growth and profitability.
K-12: Harcourt has seemed rather quiet since the Saxon acquisition back in 2004, a pretty substantial one. Do you think Harcourt is still digesting what it got and is finished, or will more M&A activity come from it?
Rosen: I know of a couple of situation where Harcourt has spoken with companies, and I've heard from sellers that Harcourt it didn't feel the timing was right. The explanation for that wasn't immediately apparent, but it could be related to some issues with Saxon. It is surprising that Harcourt hasn't done more, given its resources and new management since 2004.
K-12: It seems that McGraw-Hill has gone in the opposite direction—divesting some peripheral properties. They haven't really picked up anything new. What do you hear about them?
Rosen: One thing they did do was to bring in Bodie Marx into the Wright Group. He has experience at doing acquisitions and may bring some more activity on the acquisition front.
K-12: The leading K-12 publishers are traditional companies that do not derive a majority of their revenue from electronic products. Do you think there will come a time when we'll see a pure electronic player become one of the K-12 market's biggest participants?
Rosen: ProQuest's goal is to be the biggest electronic player. Its interest in acquisitions has always been to have something with a strong electronic component. That has been a priority for ProQuest since Aldworth arrived.
K-12: Given what you've seen so far this year, what do you expect or predict in acquisition activity for the rest of 2005 and, perhaps, into the new year?
Rosen: You've had a couple of private equity groups out there backing educational publishers. When they go out to do acquisition rollups, their plan is to exit, so they may be good candidates for acquisition. For example, Wicks sold Delta to School Specialty, and WRC sold off their jewel, AGS. As far as seeing another large deal in the $100 million+ category before the end of the year, it seems kind of remote. There may be some in the $20-$50 million range however.
For further information on Whitestone Communications, call Baran Rosen at 212-957-7100, ext. 209.
From The Complete K-12 Newsletter—October 2005
©2005 by Open Book Publishing & Education Market Research, Darien, CT: www.ed-market.com.
