Cengage Learning reached an agreement with an ad hoc committee of first lien lenders to reduce approximately $4 billion of the company’s $5.8 billion of outstanding debt, the company announced yesterday. In conjunction with the deal, and as the company announced it might in May, Cengage and its domestic, wholly owned subsidiaries filed voluntary petitions for Chapter 11 in the Bankruptcy Court for the Eastern District of New York. (Cengage’s non-U.S. subsidiaries are not included in the filings and “will continue to operate in the ordinary course without interruption,” the company said in a statement.)
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Among the points in the complex agreement: subject to the court’s approval, the secured creditors will each receive a pro-rated share of the new equity, the new debt, and excess cash. (The debtors plan to come out of bankruptcy with fewer than 2,000 holders of new equity and fewer than 500 holders of new equity that are not “accredited investors,” so as not to be subject to the reporting requirements of the Securities Exchange Act.) Unsecured creditors will be paid on a pro-rated basis from what’s left, according to a “priority waterfall.” The agreement also provides for a new term loan of up to $1.5 billion and a new first-out revolving credit agreement of no less than $250 million and up to $400 million. A percentage of new equity equal to $75 million is allocated for the implementation of a market-level management and director equity incentive program.
In addition to several banks and technology companies, the list of major creditors that signed off on the agreement also includes printers, publishers, and book wholesalers well known to the publishing industry, such as RR Donnelley, The Thomson Corporation, The National Geographic Society, Pearson Education Australia, and more.
Michael Hansen, CEO of Cengage, told LJ, that, given the lender agreement, the court’s approval of the company’s restructuring “should be pretty quick, but one thing I’ve learned is, never make too precise predictions.” Hansen said he would hope the process would be complete within this calendar year, but “I just don’t want to jinx it.”
The transaction is expected to be largely a non-event for others doing business with Cengage. The company has permission from the lenders to keep using cash flow from operations to fund the business, and expects to keep paying vendors, authors’ royalties, and employees on schedule. (Since Cengage has substantial cash balances—a vendor Frequently Asked Questions document estimates the company’s liquidity at approximately $280 million—and expects to generate positive cash flow, it does not need debtor-in-possession financing.) The company plans to keep delivering orders in full, is not planning to renegotiate any customer contracts except as they expire as usual, and is continuing to launch new products. Gale, a Cengage subsidiary, is continuing to archive its content with Portico.
According to Hansen, who took over about eight months ago, “the reason there was a problem is that our owner, Apax, significantly overpaid six years ago, and therefore put too much debt on the business.” A private equity group led by Apax Partners bought Cengage from Thomson Reuters in 2007 for $7.75 billion. (Apax also bought about $800 million of the company’s debt over the past year at a discount, according to DowJones, which would give it a greater say in the restructuring.)
In practice, Apax said it would agree to the terms proposed, with one addition: that the creditors have an option to exchange the equity they’d get in the reorganized company for debt issued to other creditors, and vice versa. Creditors wanting to participate in the swap would have to commit to how much equity they’d want to swap (or what price in debt they’d be willing to sell for) by the date ballots are due. Equity offers would be filled starting at the lowest sale price until either they were all filled or all the offered money was used up. No equity buyer would be allowed to own more than 35 percent of the reorganized company.
Separate from his debt reduction efforts, Hansen has also been working “to fix the business issues and set the company on a path to success” by focusing on digital product development, user experience, and changing the company’s “go-to-market approach” with its sales force. Those efforts started about six months ago, and while the company’s 12-18 month product development cycle means they’re not yet completed, Hansen told LJ “we are pretty much on plan.” As part of the filings, the plan itself, which would normally be kept confidential, is now available online. In it, one can see the profits inherent in the switch to digital are driven by greater rates of student adoption as well as a greater dollar value realized per student, in spite of a slightly cheaper net price.
Though the business portion of the restructuring did involve layoffs earlier this year—in March, the company reported $12.7 million in operational restructuring charges “comprised of employee severance and other costs”—Hansen told LJ the company does not anticipate any further layoffs as a result of the bankruptcy. “It is completely focused on the balance sheet, not on the operations,” he said. “We have taken those actions that we needed to take for the operational turnaround already.”
At the recent American Library Association (ALA) Annual conference in Chicago, Frank Menchaca, executive vice president, research solutions for Cengage, told LJ, “I was not asked to cut one head. In fact I’m adding senior leadership.” He added, “We’re putting out more products than ever before. Nothing is going away. I think about [the bankruptcy] maybe 1.5 percent of the time. I have other things to do. My role is to make sure Gale [one of Cengage’s subsidiaries] continues to be a successful company.”