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McGraw-Hill Sells Education Division to Private Equity Firm

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The McGraw-Hill Companies agreed to sell its education division to a private equity firm, in a long-rumored move that will shake up the evolving educational publishing landscape.

For months, McGraw-Hill has planned the spinoff of its education division into an independent company, but there was no public indication McGraw-Hill wanted to sell its new company. In the end, it agreed to sell the company to investment funds affiliated with Apollo Global Management, an international firm based in New York City, for $2.5 billion. After regulatory review, the deal is expected to be closed in early 2013. That will leave McGraw-Hill with its financial information properties; the company will be renamed McGraw Hill Financial.

The sale comes just six months after McGraw-Hill named Lloyd Waterhouse CEO of McGraw-Hill Education. He will continue to lead the company under new ownership. Harold McGraw III, the CEO of the 103-year-old McGraw-Hill Companies, will lead McGraw-Hill Financial. Under Apollo's ownership, McGraw-Hill Education will now be privately held, though some of Apollo's funds are publicly traded. As a whole, The McGraw-Hill Companies is traded on the New York Stock Exchange.

Apollo Global Management operates several investment funds with billions of dollars in equity across several industries. In education, companies such as higher education publisher Cengage Learning, Sylvan Learning's K-12 spinoff Laureate Education, and for-profit higher education provider Delta Educational Systems are already a part of Apollo's $2.7 billion Investment Corporation portfolio. The firm also owned virtual schools company Connections Academy before selling the property to Pearson. Apollo Global Management is not affiliated with Apollo Group, a for-profit higher education provider that is the parent company of the University of Phoenix.

In a phone interview, Waterhouse said he was fully aware of the sale plans at the time of his hiring, a contrast to a past stint at Houghton Mifflin Harcourt, when he was hired shortly before the company was sold. McGraw-Hill will be taking on a minimal amount of debt, which should allow the company to invest in products, Waterhouse said. Those products are likely to be increasingly digital, with a focus on curating content, technology platforms, and pedagogy.

"The mistakes some people have been making is they tend to think about portions of [the digital content] formula," Waterhouse said. "We really want to put it all together in a focused way."

We'll see how that fits in with Pearson and Houghton Mifflin Harcourt's somewhat divergent plans, in which the former is acquiring technology to create platforms for its content, while the latter is focusing on creating content and partnering with technology companies. Waterhouse said that, at least for the time being, not much will change for McGraw-Hill Education's existing school customers.

Apollo Global Management now joins Pearson and Houghton Mifflin Harcourt, itself a subsidiary of private equity, among the "big three" of educational publishers, with News Corporation, the international media conglomerate, looking to apply pressure. All four of those companies have made major financial and personnel moves in the past year, as they jockey for position in an increasingly digitized market that is also bracing for the upcoming Common Core State Standards. McGraw-Hill Education's valuation, at $2.5 billion, is consistent with its 2011 revenue of $2.3 billion; the company has ceded some of its share of a dwindling educational publishing market in the past few years, according to estimates from Parthenon Group. The final sale price is within the range the company had hoped for, Waterhouse said.

The sale has been in the works for about a year, since the company planned on spinning off the education division, Waterhouse said. He would not confirm that Cengage Learning or Bain Capital were rival bidders, as has been reported by Reuters.

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