Cengage: A Publisher to Watch

February 9, 2009

I chopped this factoid out of the foul papers for Google: The Digital Gutenberg, my forthcoming study of our pal, Googzilla. More information is here. I was poking around for weaknesses in the traditional educational publishing business model. I came across an interesting document on the Web site of an outfit called Cengage Learning Inc., which is an “indirect wholly owned subsidiary of Cengage Learning Holdings II L.P (formerly known as TL Holdings II L.P.  To me it looks as if an outfit called Apax Partners in the UK and the Ontario Municipal Retirement Service in Canada bought the “old” Thomson Learning in 2007 according to the information here.) You can read this document here. One catchphrase for a unit of the company is “A company that delivers highly-customized learning solutions for universities, instructors, students, libraries, government agencies, corporations, and professionals worldwide.”

If you are sensitive to pre-crash ownership methods as I am, the naming of this company is interesting to me. I did a little reading and located one factoid that may or may not be spot on. Here is the segment that caught my attention. Remember. This is the pre-financial crisis environment of June 2008:

On the Closing Date, Cengage Learning entered into an Incremental Amendment to its existing Credit Agreement, with The Royal Bank of Scotland plc, as administrative agent, collateral agent and swing line lender, and the other lenders party thereto, pursuant to which the Company borrowed an additional $625 million to finance the Acquisition.  The borrowings were issued at 97.625% of the principal amount thereof and require annual principal payments of 1% with the remaining amount payable on July 3, 2014.  Cengage Learning can elect the term of the borrowing period and each respective rollover period, as well as which benchmark interest rate will apply, subject to contractually specified minimum rates, plus a predefined margin.  The minimum interest rate on the additional borrowing is 7.5%.

In short, Cengage borrowed to buy a group of properties. Some of these are in the educational publishing business. I did not do a deep dive on this because I located some references to various legal actions and in my opinion legal issues are like sleeping dogs. Let them rest quietly.

cengage learning splash

An investor conference call is scheduled for February 12, 2009. Source: www.cengage.com

I did some informal and opinionate thinking.

In my opinion, if traditional publishers are struggling and if buy out deals rely on this Cengage-type financing, I wondered who was going to pay the bill for the interest on the loans. Several thoughts crossed my mind as I realized that Cengage owned such online and publishing operations as Gale Research (now Gale Cengage Learning), some of the “old” Houghton Mifflin Harcourt Publishing Company, Wadsworth Group, and Macmillan among others. (You can look at the same source I located here.)

Thoughts that occurred to me with regard to traditional publishing roll ups on a large scale like this Cengage set up were:

  1. If the economic downturn persists, the debt burden can become uncomfortable even to a healthy company and deep pocket investors. What happens if this puppy implodes?
  2. If the Cengage properties are starved for cash, what will be the impact on students? I don’t think prices will go down. If prices for educational materials increase or the revenues from electronic versions of the materials don’t perform well, institutions may start looking elsewhere for educational materials. If I were a teacher and the students or the institution could not justify the costs of educational materials, I would get on my pony and find options. I might even write my own course material and post it on a Web log. Beyond Search’s lousy write ups would work in some training situations as a text for understanding enterprise search and electronic content.
  3. Students, particularly those w
  4. ho are in love with Twitter and Facebook, may look for the needed information among their social network. This is a demographic threat and it suggests that a social gray market for educational material will thrive in a demographic happier with electronic information and services than traditional courseware and dead tree books that cost a couple of hundred bucks a copy.

You will to have to judge for yourself if I am reading these data correctly. In the aftermath of Satyam, I don’t take numbers as concrete objects because there may be context of which I am not and cannot be aware. I don’t know how many Cengage’s properties are in the educational publishing sector. If the company is hooked into educational publishing, my opinion is that there may be considerable fragility associated with the engage business model. Who or what will benefit if this business model collapses like BearStearns or GM? What role will Web logs play if a collapse occurs? What will services like Google, Microsoft, and Yahoo do? Will Cengage’s iChapters’ service pick up the financial burden and rush to the pot of gold at the end of the educational publishing rainbow?

Interesting but not a big enough issue to make it into The Digital Gutenberg. If you have some information of interpretation that adds color to my paragraphs, use the comments section of this Web log?

Stephen Arnold, February 9, 2009


5 Responses to “Cengage: A Publisher to Watch”

  1. Richard Lucas on February 12th, 2009 8:08 am

    This is very interesting.

    I would much rather see the Cengage content available in the creative commons.

    If my reading of the results is correct Cengage has lost over $500million and has interest payments of $560 million (see page 39 here

    I cannot believe that the economic crisis does not make it harder to re finance and is not putting revenues under pressure/.

    If the company goes into receivership (I have no evidence that it will) its just hypothetical, then It would be a good use of Obama bailout money to buy from the liqudators and make it all available for everyone for free for ever

    It wouldn’t create many jobs but would give unemployed people a chance to educate themselves for free

    Richard Lucas

  2. Stephen E. Arnold on February 12th, 2009 9:23 am

    Richard Lucas,

    Yep, I thought this was somewhat exciting. I wonder who has the Pepto Bismol franchise near the company’s Connecticut headquarters?

    Stephen Arnold, February 12, 2009

  3. Bad News for the Business Information Crowd : Beyond Search on February 17th, 2009 12:03 am

    […] company that appears to have an arm’s length relationship with Thomson Reuters germane. Click here to read about the debt burden of Cengage, the former educational and professional publishing unit […]

  4. Bruce on February 27th, 2009 10:05 am

    nice article and it got me thinking.

    Traditional publishing business models in most cases are built upon a top-down, “command and control” format that leverage the inherent inefficiencies (I have something you want) to create a competitive advantage. Now along comes the internet – which by its nature seeks out and destroys such in efficiency (e.g. classifieds, stock brokerage, newspapers, Yellow Pages, etc.) and WHAMO they’re eventually toast.

    History is strewn with examples of firms who could not evolve their business model because in most cases they didn’t know what business they really were in. (think AOL). My sense is that traditional educational publishers will have a bit more “plank” to walk than traditional newspapers and mag pubs because their market is both slow to adopt (educators are slow to adopt change) and the subsidized. If educators – like consumers – had to spend their own money teaching students textbooks – as we know them today – would have long ceased to exist.

  5. Stephen E. Arnold on February 27th, 2009 12:18 pm


    I just heard that the bank in Scotland may go under. I wonder what that will mean to Cengage.

    Stephen Arnold, February 27, 2009

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