Cengage Learning Holdings II, Inc. (OTC:CNGO) Cengage and McGraw-Hill to Merge Call May 1, 2019 8:30 AM ET
David Krau – Treasurer, Senior Vice President-Investor Relations-McGraw-Hill
Michael Hansen – Chief Executive Officer-Cengage
Bob Munro – Chief Financial Officer-Cengage
Nana Banerjee – Chief Executive Officer-McGraw-Hill
Mike Evans – Chief Financial Officer-McGraw-Hill
Conference Call Participants
David Farber – Credit Suisse
Mary Gilbert – Imperial Capital
Ian Whittaker – Liberum
Matthew Walker – Credit Suisse
Ben Briggs – International FCStone
Todd Morgan – Jefferies
Jing An – OCO Capital
Chris Collett – Deutsche Bank
Thomas Singlehurst – Citi
Nick Dempsey – Barclays
Matt Swope – Robert W. Baird
Greetings, and welcome to the Cengage and McGraw-Hill Merger Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Kraut, Treasurer, Senior Vice President of Investor Relations at McGraw-Hill.
Thank you, Mr. Kraut. You may begin.
Thank you. Good morning, and welcome to Cengage and McGraw-Hill joint investor call about the announcement of their definitive merger agreement. A copy of the slide presentation for this morning's call has been posted to the Investors section of cengage.com and mheducation.com. You can also access a copy of the slides at betterlearningtogether.com, a dedicated micro space launched with today's announcement.
The following discussions may contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future results and events, and they are based on Cengage's and McGraw-Hill's current expectations and assumptions. Actual results may differ materially from those currently expected. The companies disclaim any duty or intention to update or revise any forward-looking statement. This presentation, including the appendix, contains disclosures of adjusted cash revenue and adjusted cash EBITDA, which are non-GAAP financial measures. Definitions are provided in the appendix to today's slide deck.
Now let’s turn to Slide 3 for today's agenda. Michael Hansen, CEO of Cengage; and Nana Banerjee, CEO of McGraw-Hill, will take you through the details of the strategic rationale of today's announcement. They are joined by Bob Munro, CFO of Cengage; and Mike Evans, CFO of McGraw-Hill. Following Michael and Nana's address, we will open the call for questions.
I'll now turn the call over to Michael Hansen and Nana Banerjee to walk you through the merger in more detail. Michael will begin with the remarks, starting on Slide 4.
Thank you, David. Good morning, everyone, and thank you for joining. As you know, Cengage and McGraw-Hill have entered into a definitive merger agreement to create a leading provider of curated educational content and digital learning solutions across the full learning spectrum. Nana and I are delighted to be here today to talk about this exciting opportunity to join together two organizations with complementary missions, capabilities and talent.
The transaction is structured as a merger in which existing Cengage shareholders and existing McGraw-Hill shareholders will each retain 50% of the pro forma corporate entity. The deal is subject to customary closing conditions, including receipt of regulatory approvals, and it is expected to close in early 2020.
Turning to Slide 5, the combined company will be well positioned to provide students, instructors and institutions with more affordable access to superior-cost materials and digital platforms. As Nana and I discussed the possibility of combining our organizations over the past several months, it became evident to us that we have a unique opportunity to deliver significant benefits to students, educators, professionals and institutions worldwide.
With a focus on best-in-class curated content, proven digital offerings, the combined company will be well positioned to deliver superior outcome-focused user experiences for students, educators, professionals and institutions. First, the combined company will feature a rich and diverse offering of more than 44,000 titles from 14,000 authors including notable Nobel laureates and exclusive partners. Second, the combined company will bring together proven digital offerings to enhance learning and the user experience for students, educators and professionals. Our commitment to digital will continue, and our investment opportunity will be enhanced by the merger.
Third, our commitment to affordability will be strengthened through an expanded suite of options to meet the needs of educators, students, professionals and institutions. An example of this commitment will be the continuation and expansion of the unlimited subscription and Inclusive Access models in Higher Ed.
Turning to Slide 6. The combined company will have robust financial strength underpinned by the benefits of greater scale, a more efficient cost structure and an enhanced capital structure. Taking these one at a time.
First, the combined company provides greater scale across the higher education, International and K-12 businesses, expanding the portfolio of high-quality learning content and leading digital platforms. In U.S. Higher Ed, the expanded catalog and increased sales coverage will allow for the acceleration of affordability initiatives, including Inclusive Access and unlimited subscription.
In K-12, Cengage's niche advanced placement and humanities focus will complement McGraw-Hill's leading technology and proven core curriculum offerings across all subjects and grades. In International, the greater scale of the combined company will help accelerate revenue capture in key global markets such as Australia, China, India and the Middle East.
Second, the combined company will be able to achieve significant synergies with estimated annual cost savings of approximately $300 million over the next three years. While this is a large number, it represents approximately 10% of the addressable cost base of the combined entity.
Finally, achieving these synergies will enable greater investment in next-generation products, technology and services driven by improved profitability and cash flows
Turning to Slide 7. Both Cengage and McGraw have a track record of pioneering new initiatives to bring value and innovation. Cengage's unlimited subscription model is the first of its kind in higher education, quickly reaching more than 1 million subscribers in the first six months since launch and saving students more than $60 million. McGraw-Hill Inclusive Access model, which provides college students with low-cost digital materials on the first day of class, similarly saved students well over $50 million and grew by 74% in calendar 2018.
The combined company will continue these efforts to ensure affordable options are readily available for students and will broaden the program offerings upon closing of the merger.
Now let me turn the call over to Nana. Nana?
Thank you, Michael. In determining the best path forward, we anticipate the combined company will be named McGraw-Hill with details finalized prior to closing. I'm delighted to share that Michael has agreed to lead the combined company. I will continue to lead McGraw-Hill through the transition, and the combined company's leadership is expected to be comprised of members from both McGraw-Hill and Cengage and will be announced prior to close.
Now focusing on Slide 8. The combination of the two companies will enhance the position and market opportunity for each of our business lines. In higher education, as you heard from Michael, we will accelerate and expand our initiatives that have been focused on affordability, student relationships and digital.
Our digital strategy will be central to our long-term commitment to delivering high-quality learning materials at an affordable price. We will be well positioned to capture ongoing growth in higher education as students and educators continue to transition to digital and as digital adoption rates continue to increase.
In K-12, the combined companies' complementary offerings and product suites will position us to deliver an enhanced overall K-12 revenue base. In International, the combined company will benefit from a more efficient cost structure, improved sales coverage and the opportunity to better leverage global investments. The improved financial profile of the business will benefit International higher education and the [indiscernible] providing investment opportunity in emerging markets and English Language Teaching as well as global efforts of the Professional & Gale businesses.
The synergy opportunity across Professional & Gale operations is limited given the nature of the businesses. However, the scale and improved financial profile of the business can be leveraged for extension and growth given our complementary partnership and brands.
Turning to Slide 9, expanding on our K-12 approach, the combined organization will leverage McGraw-Hill's leading portfolio, technology and sales reach with Cengage's niche strengths in humanities and advanced placements to create a complementary product suite with a more stable combined revenue base. The combined company will benefit from an expanded sales force to scale our offerings across more than 13,000 U.S. school districts.
We will have deep coverage in core instruction along with enhanced supplemental and intervention products. Cengage's niche content and services focused on advanced placement and elective complement McGraw-Hill's position as a leading blended learning provider. McGraw-Hill brings deep expertise in K-12 across all subjects and grades, leading technology and a beloved brand. The combined company will be better positioned to compete and increase market participation opportunities on all major new adoptions.
Turning to Slide 10, in International, we will achieve greater scale and drive higher revenue capture via unparalleled reach and presence in more than 100 countries, including in core markets like China, India, Australia and the Middle East. With over 2,000 employees outside the U.S., including 800-plus salespeople, we will be well positioned to drive global expansion opportunities.
Higher education is by far the largest opportunity for the combined company. But there are also significant benefits for global school, English Language Teaching, Professional & Gale businesses. We will have an exciting opportunity to leverage product development resources and distribution channels across all segments to be a truly global learning company.
Moving to Slide 11. In addition to the enhanced strategic portfolio, Slide 11 reflects some figures to size the businesses for the 12 months ending March 31, 2019. Combined revenues will total $3.16 billion with approximately half of those revenues in higher education and the remaining across K-12, International, professional and reference segments. We would also have generated $889 million in adjusted cash EBITDA, inclusive of synergies, with a combined 28% pro forma adjusted EBITDA margin.
Looking ahead on Slide 12. As Michael mentioned earlier, the combination of Cengage and McGraw-Hill results in an enhanced financial profile. Importantly, it will create opportunities to delever our balance sheet while enabling investments in digital initiatives and relevant adjacencies. The global education and training market is large and attractive. Together, we will be better positioned to leverage our combined scale and talent to deliver unparalleled access and affordability to students, educators and institutions.
Finally, I know that McGraw-Hill will be in very good hands under the leadership of Michael. For our part, we at McGraw-Hill are committed to executing on the growth strategy of the combined company, and I look forward to working with my colleagues at McGraw-Hill to ensure a smooth transition and combination with Cengage.
Now I'll turn back to Michael for closing comments.
Thank you, Nana, and I appreciate your kind words and the partnership that was instrumental in getting us to this place. This is a powerful and logical combination that is compelling for students, educators, professionals and institutions. The combination creates a leading provider of curated educational content and digital learning solutions across the full learning spectrum, as I mentioned before.
This combination provides students, instructors, professionals and institutions with more affordable access to superior-cost materials and platforms. With increased global scale, the combined company is well positioned for accelerated revenue growth. We will create significant financial synergies and operating efficiencies. The transaction strengthens our financial profile, enabling deleveraging and reinvestments in our future.
However, most importantly, this merger creates a combination of best-in-class content portfolios, platforms and offerings and a commitment to affordability, which will drive global learning experiences and enhanced value for millions of students, one student at a time.
With that, operator, would you please open the line for questions?
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Farber with Credit Suisse. Please proceed with your question.
Good morning. How are you?
Good. How are you, David?
Good. Congratulations. Exciting times. I had a couple of questions. First, I wanted to just talk about – you mentioned sort of the regulatory process. So maybe can you just talk about what work has been done leading into this announcement? How comfortable you guys are in receiving approval? I know historically there has been some concern around the regulatory environment. And then to the extent that there are assets that would need to be divested, maybe just talk about that. And then I had a couple of follow-ups. Thanks.
Sure, David. Let me take this. First of all, I think we are very comfortable collectively that we have a very strong case, and we are really looking forward to engaging with the Department of Justice in this process. So I think it's fair to say that both parties would not have entered into this agreement if we weren't comfortable with this. I think it is too early and not helpful right now to speculate about potential outcomes, but we’re looking forward to engage with the department as soon as possible, which is probably going to be next week.
Very good. Okay. On the cost savings piece, I understand the OpEx numbers on a percentage basis is far less than the EBITDA, so that all makes sense. But can you just talk to us about maybe specifically what’s driving the $300 million-plus in synergies? For example, how much is labor focused? When do you expect to achieve it? The cost to incur it? And then I had one follow-up from there on the strategy going forward. Thanks.
Yes. I can give you a high-level answer on this. I think – first of all, I think we’ve got to keep in perspective, as I mentioned on the call, that we’re talking about roughly 10% of the addressable cost base. So the number sounds – in absolute terms sounds pretty big, and it is, but it is, relatively speaking, a smaller fraction of the total cost base. And it is a combination of labor costs and non-labor costs in terms of we have significant opportunities, as you can imagine, for consolidation of sites, assets, platforms, digital infrastructure, et cetera. And as we indicated, the time frame is three years in which we’re going to realize those savings. But, as Nana said, we feel pretty comfortable about this number because we did quite a bit of work to get there collectively with McGraw-Hill.
Got it. I imagine others will perhaps talk about this, but I wanted to talk about the strategy given, obviously, two companies taking a different look at Higher Ed. Maybe what’s sort of the pro forma view from you on sort of how you’ll think about the Higher Ed business with respect to the unlimited platform, which has been a success in – on the McGraw-Hill side and more of a rental business? How do you think about that on a pro forma basis given what I expect will be an important strategy for the company on a go forward? Thanks.
Yes. David, let me, first of all, make a point that I would like to invite Nana to chime in on this. I think the first and most important thing to understand is that we are both committed to choice. We don’t want to force students into any particular experience. We don’t say the only thing you can do is unlimited, the only thing you can do is Inclusive Access, the only thing you can do is rental. I think the notion that a company can dictate to its customers what they are going to do, I think, is a way outdated notion and certainly does not apply to our industry.
So we’re very committed to choice. As part of that, we are committed to the unlimited offering. We are committed to the Inclusive Access offering. So we will give students choice, and we will drive affordability into this market, as we have in the past.
And what I would add to that is clearly, what we are bringing to the table is a broader catalog and a broader suite of offerings, as Michael described. And the common theme to these are affordability and access. And that’s what our focus is. And to Michael’s point, we are very sincere about keeping the optionality, and the broad set of offerings will continue and will determine if – will be determined by our end clients, which invariably are the students or the faculty.
Okay. I open it up to others. Thanks and congratulations.
Thank you. Our next question comes from the line of Mary Gilbert with Imperial Capital. Please proceed with your question.
Yes. Good morning, and congratulations.
Thank you. Good morning, Mary.
I wanted to find out with regard to converting McGraw-Hill content to the unlimited model. Would you be able to have that process completed by the time the merger closes? Or is that something you have to start after? And then would there be a change in the pricing given you’re almost doubling the size of the content that would be offered? And then how should we think about where we are in terms of the digital shift and the inflection point in which the used books become less relevant in terms of the – disrupting the industry? And then I had some follow-ups.
What was the last one, Mary? Say that again, please, the last one.
How should we think about the progress that we’re making in the overall digital shift in the industry and the inflection point in which used books in terms of being a disruptor to the industry is becoming less relevant? Are we seeing that declining? And then I had some follow-ups.
Yes. I can take a crack at the question. There is – clearly, in the spirit of what we were just talking about, there is an openness and enthusiasm in considering the possibilities as we put McGraw-Hill content on the unlimited platform. But to do anything or plan anything before a formal close would obviously be – will – would not be the smart thing to do from – for many reasons, including regulatory.
So this is something that we’re very open to, and we will be excited in assessing what the implications are, both with respect to pricing, if we’re going to double the content library. Clearly, to look at the dynamics of what it does to the profitability and margins is something we would, of course, look at. But the commitment to affordability, access, the spirit of unlimited and the spirit of Inclusive Access, none of that’s going to change. Now with respect to the point of inflection, yes, we do expect at some point, as we have more and more digitized products coming in, there is a rental program that McGraw-Hill has championed.
And there is a half-life that is associated with kind of taking out this used secondary market book enterprise that really has been a disruptor for us. We would expect that to be kind of a four to six-year window. Every new frontlist that becomes a backlist and as we stick to our rental program is helping us kind of age out the ones – the books that are now in circulation but kind of becoming less and less relevant from the prior vintages. So I think four to six-year year window seems appropriate. I think we’re going to be more than half way through within the next 2.5 years given that we’re already one year into our rental program. Would you add anything?
Yes. So Mary, let me answer your question – or the series of questions that you had a bit from our most recent experience, particularly around Cengage Unlimited. So Cengage Unlimited has 1 million subscribers and has saved students $60 million. And we are going to continue to drive that, and we’re going to continue to drive this now with the enhanced content and platform that McGraw-Hill brings to the table, which I think is fundamentally really good news for students, first of all; and secondly, I think it’s also good news for the company because clearly, we are making it for students less appealing to go to the aftermarket because frankly, the offering that they have is affordable and the offering that they have is fair value for money.
And that is the reaction that we’ve gotten. So why would you go to the aftermarket if you have a compelling choice of options in front of you? And we think unlimited is a very compelling one. So that in and of itself will drive the transition. And then the other part about what unlimited does, it obviously also lowers the barrier to entry to digital. Let’s not forget that 80% of the cost experiences in this country today are still print. They're print experience. And they have not access to the tremendous platforms that, for instance, McGraw-Hill brings and that Cengage brings to the learning experience. And therefore, we have a significant growth opportunity into these traditionally now print segments, and so we feel very good about that.
And lastly, in terms of what we can plan or what we can't plan, we obviously, as Nana said, will stay strictly within the guidelines of the Department of Justice. We're not going to jump ahead with anything. But there's a lot of things that we will discover together over the next few months as we are looking to really plan what we're going to do if and when we get the approval.
Okay. That's very helpful. Thank you. And so does this propel you to be the number one publisher in higher education with like a 45% share? And then finally, with regard to the merger of equals, does that trigger a change of control in the bonds of both McGraw-Hill and Cengage? And what would be the plans for an IPO? Thank you.
Okay. Well, you got all your questions in within five minutes, Mary. That's impressive. Okay. So let me talk about first – is it the – sorry, what was the first question?
It's the Higher Ed position – Higher Ed market position.
The Higher Ed market position, yes. So Mary, I think the numbers that you quote there, I think, is actually – it's looking at the market in a very traditional way. You're just looking at the publishers' and MPI data that's kind of the only data that's there, unfortunately. But the reality is that this market is actually very different because there is plenty of opportunity to source materials from providers, rental companies, used companies, PDFs, you name it. Based on our internal calculation, we have significantly lower market share as individual companies, and we're more in the low teens than we are in – anywhere near that number that you are quoting.
The choices for students are plentiful. And if you just go to a bookstore these days, you could see whatever they can get. And if you go online, go on Amazon, you will find plenty of alternatives. So I think with regard to the marketplace, it's exciting because we have significant growth opportunity, and it's not nearly that level of concentration given how the aftermarket has developed for Higher Ed. Bob, do you want to add…
Hello Mary. It's Bob Munro. The second question, I think, was – is a trigger change of control. The answer to that is no. The way the merger is structured, there will not be a change of control.
And the third question was on plans for IPO.
Plans for IPO. Look, I think Nana said it this morning actually best. The IPO, yes, it's an option, and we'll look at all the options. But the first thing we've got to do is focus on our customers rather than focus on the financial events. So we'll focus on the customer. Then if the right time comes, then we'll take opportunity of that.
Our emphasis right now is, as Michael just said, the consumer and ensuring a smooth and substantial integration, that it goes well and we are well on our path to getting to the synergies that we believe we can and hopefully deliver more than that. Thank you.
Thank you. Our next question comes from the line of Ian Whittaker with Liberum. Please proceed with your question.
Thank you very much. Just a – one or two things. I mean first of all, sort of you mentioned about the International part. And you sort of mentioned that higher education is the biggest opportunity there. So they’re all – just in terms of that, I mean, do you think you’ll pursue the same sort of strategy that you’ve – that you’re pursuing in the U.S.? I mean there are always differences sort of between markets and also as well just in terms of the pricing structure.
But actually, do you think you’d still go for the aggressive market share gains that you’re talking about in the U.S.? And then second of all, just in terms of the overall market, you talked about the growing education and learning market. So areas such as professional education, I mean, have not really been part of the focus so far and for either of you. Would there be a more aggressive push in those sorts of areas?
Yes. Thank you, Ian. Let me take a crack at the first one. And I’m glad you asked the question because it gives me an opportunity to clarify something. What we are doing in the U.S., particularly on the Cengage side with affordability, is we’re trying to solve a problem of a customer that exists in this market.
And the problem of the customer that exists in this market is affordability, and we’re trying to solve that problem. That problem doesn’t exist in some other markets. If you look at the price points – in most other markets, if you look at price points in India, if you look at price points in China, affordability is not the problem that we’re trying to solve there. So the fundamental principle is we’re going out and we’re looking for opportunities to serve our customers by solving their problems.
So it’s very different than, say, oh, I got this one model and now I’m going to make the world happy with this one model. That’s not we’re looking. We’re looking for solving specific problems, and that’s what we did with unlimited in the U.S. and what McGraw did with Inclusive Access in the U.S. That is a very specific problem to the U.S. market. And then on professional education, I think it’s pretty clear. If you look at our K-12 and Higher Ed segments, these markets are flat to slightly declining. The reason is that students are not going out anymore into the grade. I mean one is demographic, but the other one is also they’re not going out to – at the rate they used to go out to look for formal degrees. So we are seeing declines in Higher Ed to the tune of like 2% year-over-year decline.
So there are headwinds. But the important thing is learning is not declining, meaning they’re looking for alternative ways either in the setting of an employer, as you said, professional education, online education, and our content is highly relevant in those settings as well. It really doesn’t matter where the student learns. So the short answer is yes, we will be looking for opportunities to get distribution into those segments where students are learning today and then have more organic growth characteristics relative to the traditional U.S. higher Ed market.
Thank you. And if I may just ask a follow-up question just in terms of the International side, I mean you talked about it sort of – sorry, remind me about sort of affordability being the main issue in the U.S. But you talked about different challenges in markets such as India and China. I mean what you see as the particular challenge in those sorts of markets? If it’s not price, what is the – what are the challenges for students?
So I – and that’s a very fair question. So at a global level, what we really – what we see as a common theme is access to high-quality content, a general access to the enrichment of a learning moment. That’s the time instructors spend with students and how do you enrich that. That’s a global challenge, and that’s a global need kind of in respect of the country or the market or the level of the classroom. And that’s – and we have a solution for that, and that is through our digital platforms and adaptive learning solution, including a McGraw-Hill product called ALEKS, which is a great example of it.
And the whole direction that obviously what Michael talked about and that I previously reiterated, the opportunity is to the emphasis on digital platforms that is more analytically driven, that is far more focused on getting those high-quality content that we’re already known for but in a way where it’s more accessible. And affordability in the U.S. scheme is as important. But to get it all at scale where volumes are available for us to take advantage of and we kind of meet those core needs is a win, win, win.
So just one final comment to add that’s what exactly what Nana was saying, so we’re looking at a customer problem – solving the customer problem. Let me give you an example, Ian. When you said so what is the problem in China, what is the problem in India, well, I can tell you the problem in China is that they all want to learn English. That’s their first problem, okay?
So we have an English language product that we’re selling under the National Geographic brand which is growing significantly in China because there’s a huge demand for English language learning. 300 million people today in China are learning English as compared to about, I think, 30,000 in the U.S. learning Chinese. So you get a sense of the degree of the opportunity there. And we will look – and we are taking advantage of that opportunity. And frankly, I think, in combination with McGraw, we have an amazing access and greater access to these markets.
Thank you. Our next question comes from the line of Matthew Walker with Credit Suisse. Please proceed with your question.
Thanks a lot. And good morning or good afternoon everyone. The first question is on unlimited when you fold in the content from McGraw-Hill. Would – you told about a doubling of the content set there. Would it be accurate to say, though, that you won’t double the price? Because obviously, you need to enhance the attractiveness of the offering. And is it still true that when you look at your competitors, you still would like to aggressively gain market share and you would have a better chance of doing that with an enhanced unlimited product? That’s the first question.
Second question is you haven’t mentioned online program management very much. Do you have ambitions to do much in online program management? And then the third thing is in terms of developmental math. Would you say that your major competitors are losing share and you are gaining share? And will you have anything like the global learning platform that your competitor is building? Is that one of your ambitions? Thank you.
Matthew, it’s Michael. So let me tackle the first question on unlimited. The focus that we have with unlimited is to save students money. And we have proven to do this. We are not going to discuss specific pricing strategy. It’s way too premature. But I think it is safe to say that what you said is correct, that it’s not going to be a doubling of the price. OPM,
I personally – and I think Nana and I share this conviction that what we are focused on is the learning experience between the teacher and the student. We’re not in the business of recruiting students to schools. Maybe some people want to do that. I don’t believe it’s necessarily a business that we are good at or that we should be good – that we should be getting at. And then finally, on developmental math. Look, I could tell you that based on the results that we’re seeing with unlimited, we're gaining share across the curriculum, and that includes developmental math. And I'll leave it to you to judge the performance of Pearson in that respect. I think you have a better view on this than I have.
And the one thing I would add to it, Matthew, is we have an award-winning supplemental math development program in ALEKS. And in – and so this is where the complementarity really helps between what Cengage is bringing and what we already have. And as a combination, that does make a very compelling combined offering.
Thank you. Our next question comes from the line of Ben Briggs with International FCStone. Please proceed with your question.
Good morning, guys. And thank you for taking the questions. I just have, I guess, kind of one here on the capital structure. So what is the plan for the pro forma capital structure? Are any bonds going to be taken out? And then I see here on Bloomberg that you guys have launched a $3.34 billion firstly in term loan. Just any clarity on the use of proceeds for that. And then that's all for me. Thank you guys.
Yes. This is Mike Evans. In terms of the notes, they'll remain in place. What we will do, though, is extend or exchange the term loans into a combined tranche. On the extended maturity, that – we'll discuss them with you, a lender presentation, at the beginning of next week.
Okay. That’s Perfect. Thank you guys.
Thank you. Our next question comes from the line of Todd Morgan with Jefferies. Please proceed with your question.
Thank you. And congratulations on the big announcement. I had to look it up, but I think it was 2013 when Apollo bought McGraw-Hill way back then. And there at the time was meaningful contemplation discussion about the potential combination of the two companies even at that time. If you were kind of fast-forwarding from then until now, can you talk about kind of the differences in the industry or how you would see the regulatory hurdles then versus now? I mean, obviously, I think you did say lower. But could you help us understand why?
Yes. Todd, happy to do this and I had the distinction of being there in 2012 and hearing those discussions at the time. I think we are living in a fundamentally different world in the sense that there is an absolute plethora of choices that students have right now to obtain their learning materials. And the markets has fragmented. The competition has fragmented in this market.
There are literally tens of – well, hundreds of different ways that students can get their learning material and that's good in the sense that it has actually put significant price competition in the market and it has lowered the prices for students, as you could see from all of the evidence about the average cost for students to obtain their learning materials have gotten down significantly over this period of time. However, at the same time, as I said before, still the digitally enabled learning experience is a minority, and it's a minority, because students don't have access to these materials and affordability still plays a big role in this. So we are committed to both, providing affordable access to content and driving a 21st century good digital learning experience at scale into the education system, whether it's K-12 or Higher Ed.
And if I may just jump in and add. I think the biggest change from five years ago to now and if you just look at the trend is there's a massive secondary market that has really disrupted kind of the traditional publisher's ability to price in the way it used to. And for good reasons and all the right reasons, we see a significant and a permanent move towards affordability, and that clearly is a mission of this merger.
The same aspect that you've seen is the advent of who we are or the online education resources that have really come in. There's the ubiquity of both kind of the PDF downloads and other forms of access to higher education materials. That made the industry just fundamentally different from what it used to be, and that kind of, one, compels the urgency of our companies coming together but also the opportunity of what we do together.
Thank you. question comes from the line of Jing An with OCO Capital. Please proceed with your question.
Hi, good morning. Congratulations. Michael, I just want to ask a few questions to really think about free cash flow after the merger is done. We in the past talked about deleveraging. Just curious, given the synergies we have, even if I count just half of the synergies, if I start from adjusted EBITDA of, call it, $770 million, how much would be the right amount of cash on balance sheet with the newco? And how much would be the ballpark CapEx number, i.e., non-prepub CapEx number? And then how do we think about interest expenses? I'm assuming we're not going to pay a lot of taxes. Just trying to really set a framework to think about how much free cash flow the new business will be able to generate. Thank you.
It is way above my pay grade, so I will let Bob chime in on the professional question.
I think the first thing to say is we are going to take you through that in a fair amount of detail when we get together next, next week. So I was going to save some of the details for then. But just getting in on a couple of points that you heard previously, you'll have seen the pro forma to the financials, the revenue of $3.16 billion and how that's expected to translate into adjusted cash EBITDA of close to $900 million and a 28% margin. We expect a sort of commensurate rise in the levered free cash flow. The impact of CapEx will sort of depress that number sort of slightly. But for the time being, I would actually sort of think about a lift of around sort of 70% of the combination.
Thank you. Our next question comes from Chris Collett with Deutsche Bank. Please proceed with your questions.
Thanks very much for taking the questions. And congratulations on the announcement today, I just had two questions. One was just a point of clarification whether the synergies that you're guiding to – are they over and above the mid-20% margin that Cengage had previously guided to?
And then the second question was just coming back on unlimited and your process of evaluating whether you're going to put the McGraw-Hill content onto the unlimited platform. I think part of the logic of unlimited was always around its ability to gain share clearly from the secondary market but also in the primary market as well. So just wondering to what extent will that become harder as you become – as your share increases. In other words, do you think you can sort of still continue to gain share with the unlimited platform even if you do increase the amount of content that sits on it, if that makes sense?
Yes. No, it makes a lot of sense, and let me take it a bit in reverse order. So in terms of unlimited share gains, we – the reality is there are not just three large publishers in this market, but there are a large number of smaller publishers in this market as well that are primarily focused on print in this market. So we believe that there’s opportunity to continue to take share. And the second thing is the secondary market that Nana was alluding to before is a significant opportunity. Let me just put it in real terms. I mean with – students are forced today to spend days, if not weeks, looking for whatever the cheapest solution is.
And maybe I get a rental, maybe I rent it only for a short period of time, maybe I get a used book, maybe I’ll copy something or maybe I’ll download illegally. It’s just a very cumbersome and frankly time-consuming process. We’re making it easier, and that is a compelling way that we can get share from the secondary market. Much like I like to use the analogy of the music industry. Like around 2000, people were stealing music files on Napster. It just doesn’t happen anymore. Why? Because it’s compelling and affordable and people have streaming services. So that’s the direction that we see this industry heading in. And then the first question was on the synergies. Remind me what that question was.
So just the synergies coming on top of the – you had previously guided to a mid-20s margin for Cengage.
Yes. Yes. They’re coming on top of that is the answer.
Great. Thank you very much.
Our next question comes from the line of Thomas Singlehurst with Citi. Please proceed with your question.
It’s Tom Singlehurst here. Thank you very much for taking question. So with the – but obviously, congratulations on the deal. It’s very compelling. The – I had a couple of questions actually. One on the affordability point because it – I just wanted to check. When you’re talking about affordability, you are just talking about that sort of general shift from outright to access rather than directly cutting prices. So a couple of questions on the back of that. One, is that the right interpretation?
And then secondly, I think that people pointedly – at the point of combination, obviously, in due course, you might take share reduction. But will there be any revenue dis-synergy from this transaction? Or do you think you’ll be able to take enough sort of share from the aftermarket to offset any revenue dis-synergy? And then a second question on the cost saves. 10% of addressable costs doesn’t feel overly aggressive. Should we view this as conservatism and that envelope of savings might – right at the time? And then I don’t think you answered earlier on what the precise costs of achieving those savings would be. Thank you very much.
Sure. Let me take that actually, Tom, in a bit of a reverse order. So on the cost savings, we have done a fairly thorough but obviously top-down assessment of the cost savings. We feel very comfortable with the numbers that we have put out. But obviously, as part of our planning for the merger, we will dive deeper and then assess whether that number holds or can go up. But in any event, we feel very comfortable with the number that we have called – that we have put out.
Secondly, you asked about revenue dis-synergies. We really don't see any revenue dis-synergies at this point between the combined entity. And then finally, the question on affordability. I think the drive that we have put into the market is really around – with unlimited is a drive towards affordability, a fair price where people say I'm getting a fair price for the materials and, importantly, I'm getting a fair price for a digital experience that I can now have.
And I – it allows me to consume materials in an adaptive way to customize it to my own personal experience. And that is the digital experience that I have. And our experience has been that students are very willing in Higher Ed to pay the price that they consider fair, and we consider that a fair offering.
Thank you. Our next question comes from the line of [indiscernible] with Barclays. Please proceed with your question.
Hi, good morning guys. It's actually Nick Dempsey, my colleague's line. So a quick two questions. First of all, when you look at all the people that have done large savings plans in your market, in general those savings have not – so it will impossible to stack those savings on top of their starting EBITDA because the savings had underlying cost inflation and investment.
So effectively, when you show on Slide 11 and 12, are you assuming that the business can grow top line to absorb up cost inflation and investment? Or would some of these savings probably over the three years end up being somewhat absorbed and, therefore, the net number is lower?
And the second question, quarter to end March, McGraw-Hill have just shown us 12% growth in billings in Higher Ed. Cengage clearly grew a lot on an adjusted cash basis. They haven't split out learning. Pearson declined slightly in the quarter. But all you have talked about not much changed to share gains on an MPI basis. So is the apparent discrepancy really a function of how you all recognize and report revenue? Or do you actually think that you are taking share from Pearson in that quarter?
Well, I mean, obviously, in this respect to the share gain, I cannot speak for McGraw-Hill. But what I can tell you unequivocally for Cengage, on an MPI basis, we have gained share. We have put that out. We have even quantified that we had a 65 basis point share gain, which in this industry is actually fairly unusual historically. So that question is we ask it from our perspective. What I will say, I mean, one of the problems in this industry is that the data is just like so scarce that a lot of people can pick certain data points and make a story out of this. But MPI data definitely shows share gains for Cengage.
And if you think about McGraw, share has been relatively consistent in terms of classrooms. Where we see that growth is actually in the increased move to digital. As we move to more and more digital, we're taking share from the aftermarket essentially. And so that's been a big part of our growth in Higher Ed.
And then to the first question that you had, Nick, about is the – are the synergies going to be partially absorbed by lack of growth of the top line. We believe, based on the analysis that we have done, that we can return the Higher Ed business to growth based on what we just said about having affordable solutions, gaining share from the aftermarket, gaining share from competitors by putting a real focus on the student learning experience. So the answer is no. We don't believe that the synergies are going to be absorbed by lack of growth.
Thank you. Our next question comes from the line of Matt Swope with Robert W. Baird. Please proceed with your question.
Yes. Hi, guys. Just a couple for me, if I could. Could you just confirm on the capital structure pro forma that we'll have the two silos still and that it looks like even this new term loan will be split into the two silos? Then just a couple of others. Could you comment on whether there are any breakup fees in the deal if there should be a reason it doesn't go through, regulatory or otherwise? And then my third one for Nana would be with the numbers that you guys put out last night. any comments you could make about taxes and your comments on the K-25 BLA results being disappointing so far. Thank you.
You want to take the first, or should we start…
Michael Evans, you’ve gone for number three.
We talked a little bit about taxes. And maybe we'll talk about taxes more in the context of overall K-12 performance. We're feeling good about overall K-12 performance for the year in terms of our growth alongside of an anticipated growth in the market. Like anything, in K-12, there's a certain lumpiness to that because there are different markets and each market has different characteristics. We feel that we're doing very well in open territory this year and expect solid result there.
We're actually overperforming our expectations in California with social studies and science adoptions that are ongoing there. In Texas, it's a little bit of a mixed bag. We feel comfortable with where we're at in terms of our 6, 8 performance in the adoption, but we do feel that we're underperforming in K-5, which is something that is a bit of a disappointment for us. But in the broad context of our overall K-12 performance, we're feeling good about it for the year.
If I can pick up the question on the sort of capital structure. Just to be clear, we are consolidating the businesses into single tower, and the two separate sort of tranches will be consolidated into a single fungible tranche. As Mike mentioned earlier, we're also looking to sort of co-term and extend the majority of that sort of single tranche.
Yes. And lastly, on the question of breakup fees, we'll share more information at the lender presentation next week. So we'll get into that in more detail at the time.
There are no further questions at this time. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.