Cengage Learning announced today that it has emerged from Chapter 11 bankruptcy, having completed its financial restructuring, eliminating approximately $4 billion in funded debt and securing $1.75 billion in exit financing. LJ caught up with Michael Hansen, Chief Executive Officer of Cengage Learning, to find out what this means and what’s next for the company.
Why was Cengage in this predicament in the first place?
The story really started in 2007. Cengage was created from a buyout of Thomson Learning by private equity firm Apex Partners. 2007 was the height of the buyout boom and frankly, it was a bubble. As a result, Apex paid a very significant price for the business, and was overleveraged. The idea from Apex’s point of view was that this is primarily a higher ed textbook business, where they could sell new editions of print textbooks with price increases every year, and everything digital was icing on the cake and that that model was going to hold up for five more years. The reality that panned out was that for the first three years, that thesis held up. Then, students started to vote with their pocket books, and a significant market for used and rental books came into being. When I arrived in 2012, it was clear that model wasn’t going to be one that would sustain the company going forward. So we did a complete reset of the company, and as part of that, we decided to file Chapter 11, because the balance sheet we had couldn’t support the new direction we were taking as a company. Now that we’ve emerged from that process with four billion less in debt on our balance sheet, we’re well capitalized and appropriately financed to execute our business plan going forward.
What does that business plan look like?
We are building products that are focused on student and faculty end user needs. As part of that, we are driving this business from print to digital, with a clear acknowledgement that at some point, the textbook will be replaced by a digital solution. When that transition will be complete is not yet clear, but we want to start building compelling alternatives to textbooks while we’re still selling print textbooks.
What does today’s news mean for your library arm, Gale?
In libraries, the transition to digital has already happened. Seventy percent of our revenue at Gale is from digital products. The problem is that library budgets are not growing. For us, that means we have to focus on clearly differentiated, must-have content. We also see significant growth opportunity for our library products internationally and in developing markets
When you look at growth potential in international markets, does that consist of new products for those countries, or of finding new markets for familiar Gale products?
Of all our businesses, Gale is a good example of one with a truly global product. Those are products that are in demand in places like Brazil, Mexico, and South Korea, and there is very little adaptation necessary to prepare them for those markets compared to a higher ed product.
What have been the keys to the company emerging from Chapter 11?
This was an extraordinarily complicated case from a legal perspective. We had the original owner, Apex Partners, as an owner of the equity and a significant holder of first- and second tier liens—that put them sitting on both sides of the table, so to speak. We also had 15,000 copyrights that weren’t properly secured for first lien holders, and debate over the value of those copyrights made this a complicated case. The key was that we managed to create a process that got everyone around the table to a consensus opinion, which was the result of a lot of negotiation and mediation with all the parties involved.
The other key was that we were able to run the Chapter 11 process in parallel with turning the business of the company around. It was a challenge, but we separated the two and the worked hard to ensure that the filing had limited negative effects on the business.
What does this mean for Cengage Learning customers? Can they expect any changes in their day-to-day business with the company?
Our customers can expect to see business as usual. The only thing that will be meaningful to our customers is that, because we have a robust balance sheet now, we’re able to invest in the business more forcefully. During the bankruptcy, for example, acquiring a new business would have been very cumbersome. Now we have a new board, excellent liquidity, and can make an acquisition in a fast paced way. That’s something customers will see down the road, but in the short term, we’ll continue to deliver as we did before and during the bankruptcy process.
What sort of companies could we expect to see Cengage acquire now that the company has more flexibility on that front?
I’m a big believer that the foundation of a good strategy is a strong, organic growth plan. That said, acquisitions can play a meaningful role for us when it comes to accelerating workflow solutions for users. If someone has a digital solution that would allow us to deliver our content in a better way, that would be of interest of us.
When we reported on the Chapter 11 process last, we were told that layoffs were no worry, and that in fact the company was planning to expand. Is that still the case, and if so, where can we look for those expansions?
Absolutely. We are expanding the business, especially our offices in Boston and San Francisco. By the end of the year, we expect to have 500 employees in each of those offices, with a focus on digital product development for both libraries and higher education.
Looking forward, what are some of the things you’re excited for at Cengage Learning in the coming year, particularly with an eye to libraries?
What I’m excited about is that, after a period of some distraction for Gale, we have a clear focus on its customer, the library. We have a focus on what library users need from us, and a development process that’s closely linked to that. We’re getting away from the notion that more content is always better. Instead, we’re asking more questions about the needs of our users, and trying to answer them by looking more closely at data on how our products are used. The new product development process is much closer to software than publishing, and I think that bodes well for our place in the market.