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In the News: Cengage Learning Using Bankruptcy to Restructure for Future Growth by Nancy K. Herther

by | Jul 14, 2013 | 2 comments

Cengage Learning Using Bankruptcy to Restructure for Future Growth

by Nancy K. Herther

Cengage Learning filed for Chapter 11 protection in Bankruptcy Court for the Eastern District of New York on July 2, 2013. The company comprises three major units. The Academic & Professional Group (APG) is a publisher of print and digital information services for the academic, professional, and library markets, including textbooks, educational software, and training programs. Gale provides a wide variety of reference and e-research and educational products to libraries, schools, and businesses. This includes more than 600 databases and their licensing of content to others (such as Dow Jones) for integration in web-based information services. Cengage’s International division, not a part of this bankruptcy action, is responsible for the adaption of their domestic products for distribution to more than 110 countries around the world.

In announcing this, the company stressed that “our customers can be confident that they will continue to receive high quality educational content, products and industry leading services and support they are accustomed to without interruption. Our vendors can expect to be paid in full for all goods and services provided from the date Cengage Learning filed for Chapter 11 forward. Our employees will be paid in full and will continue receiving their benefits in the same way.” The company employs an estimated 5,500 employees in 20 countries across the globe.

A Little History

Until 2007, Thomson was also a major worldwide provider of higher education textbooks, academic information solutions, and reference materials. Thomson (now Thomson Reuters) amassed its portfolio largely through acquisition. In September 1998, Gale Research Co. and The Thompson Group merged, with Gale maintaining its name and significant operating independence. In October 2006, the company announced its intention to break up and sell the renamed Thomson Learning market group.

In May 2007, Thomson Learning was acquired by Apax Partners and soon renamed Cengage Learning. “The name Cengage Learning reflects our commitment to promoting engagement and improving results for all of our customers,” noted then-CEO Ronald Dunn. Apax, a private “independent global partnership focused solely on long-term investment in growth companies,” noted that their financial success is “rooted in a culture that has always been outward looking, pioneering and committed to growing businesses.” In the case of Thomson Learning, Apax, together with funds advised by OMERS Capital Partners, may have been a bit over-eager, paying $2.75 billion over the estimated value of the company of $5 billion.

The floundering company brought in a new CEO, Michael Hansen, in September 2012, calling him “a seasoned executive with significant experience in guiding digital transitions in publishing businesses, and we feel he is highly qualified to lead the company through the next stages of its growth strategy.” However, red ink was a major priority. Cengage now estimated to be worth $4 billion was carrying a debt of $5.8 billion at the time of the Chapter 11 filing.

In May of this year, the company announced that it was considering both restructuring and Chapter 11 to address its financial situation. “We will seek to negotiate the terms of a comprehensive restructuring transaction with our key creditor constituents and quickly implement the restructuring plan,” CEO Hansen explained in May. Chapter 11 bankruptcy involves restructuring as the goal—very different than a Chapter 7 bankruptcy which involves liquidation of assets. In this case, Cengage has proposed to eliminate its equity holders (also called shareholders, those with a financial stake in the company) and have their debtors brought on as the new equity holders (owning a share of the company—but no more than a total 35% stake).

“The Chapter 11 process can be an effective way of achieving a fast and efficient debt restructuring with minimal disruption to the business, particularly where agreement is reached with key financial stakeholders on a plan—on the outlines of a plan—prior to the filing.” Also in March, Cengage announced that it had drawn down most of its revolving credit lines and hired restructuring adviser Alvarez & Marsal. “The next component of our transformation is the restructuring of our corporate balance sheet and reduction of debt to support our long-term business strategy. The reduction of our debt and the improvement of our capital structure will give Cengage Learning a greater capacity to move forward as a digital education leader and world-class information provider.”

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