Cengage is the successor company to the old Thomson Learning (Thomson education business), which was sold to APAX (a London-based private equity company) and Omers (an Ontario pension fund) in 2007. The company is largely focused on the higher education market. Its learning segment accounts for almost 65% of revenues, and Gale, the primary sources business which sells mostly to colleges and universities, accounts for another 16% (Exhibit 14).
Cengage is a pioneer in inclusive access and Cengage Unlimited, its full catalog subscription, was the first full offering of this kind. Cengage was also the first major publisher to offer a product branded as open educational resources (OER), although the content is still purchased by students enrolled in a course. In recent years, Cengage has been the most visible of the major companies in slashing their prices and reframing their products as a solution to the high cost of textbooks (although they continue to offer traditional products as well). Anecdotal evidence has revealed aggressive marketing tactics for Cengage Unlimited, including contacting student governments to request help lobbying the administration to purchase the full catalog subscription.
Cengage struggled significantly in the years after the Apax/Omers acquisition. It tried to improve its performance by raising prices aggressively, but it could not avoid a reorganization and an organized bankruptcy in 2013, with the goal of shrinking the $5.8 billion of net debt it had at the time. The original acquisition cost Apax $7.75 billion, to which must be added the $750 million to acquire the college textbook business of Houghton Mifflin in 2008 and the textbook business of National Geographic in 2011 for an undisclosed amount. In the end, the debt burden proved too onerous, and the restructuring allowed the company to bring it back to acceptable levels. As of the 31st March 2018, the company had a net debt of $1,932.3 million. Since the adjusted EBITDA was $298.5 million, the net debt/equity ratio is a high, but still manageable at 6.5x.
The long-term exit plan for the owners of Cengage is not clear. An IPO would be subject to the same investor sentiment which has prevented McGraw-Hill Education to complete its own IPO. An industry sale could run into anti-trust concerns, since the three largest publishers hold a substantial share of the market and any consolidation among them would raise concerns.
Other Publishers
It is worthwhile to note that there are other, smaller publishers in the Courseware business. Wiley, MacMillan, and SAGE all have higher education textbook businesses, often with one or more areas of specific focus (for example, Macmillan has an historic focus on the social sciences and humanities, and Wiley has always been very visible in business). OpenStax, a nonprofit open textbook publisher operating out of Rice University, has successfully launched a set of introductory for high enrollment courses. These textbooks are openly licensed, free online, and available in print at a low cost, and are also backed by a marketplace of optional supplemental materials.
Estimating market share among publishers has been difficult. Higher education publishers report their revenues to the AAP (Association of American Publishers), which aggregates and circulates them. The consistency of the reporting has been called into question, however, in part because there is no clarity about whether all of the publishers are consistently reporting their courseware revenues (some may include sales of teaching materials, while others may only report courseware shipments). Additionally, revenues are reported at the time of shipment (minus provisions for estimated returns), so publishers could potentially inflate revenues in any one quarter or year by shipping larger numbers of books during that time (or lowering their estimates for returns). Finally, as publishers scrambling to ink deals with institutions that trade higher sell-through rates in exchange for temporary discounts, revenues may not be the most reliable indicator of market share at this point of transition.