During one of my recent catch-ups with RTC Accelerator participants, I realized there was interest in understanding how different styles of private equity firms invest. So today, we’re using McGraw Hill to explore the value / contrarian investing playbook, through the lens of Apollo’s acquisition.
But before we dive into this week’s topic,
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State of Play
When Apollo acquired McGraw Hill in 2013, it wasn’t a typical roll-up playbook. Even back then, there was no fragmentation in the textbook publishing industry as the top 5 major publishers (including McGraw Hill) made up ~80% of the market.
The initial buyout thesis was simple: everyone knew physical textbooks are going obsolete and that they are going digital. McGraw Hill, then an orphan subsidiary of financial data company S&P Global, wasn’t going to be able to pivot to the digital world on its own. Apollo was going to carve out McGraw Hill for cheap (reportedly 7x acquisition multiple) and transform the company into a digital company.
To me, this case study is instructive on the concept of terminal value. Apollo acquired a business with a grim future in physical textbooks, re-oriented the business into digital for the next chapter (and made money buying at 7x and selling at 9-10x), and now Platinum faces threats disrupting sustainability of that digital business model (and losing money buying at 9-10x and trading now at <7x).
Quick sneak peek: stock isn’t doing so hot (and Platinum still holds 86% of the shares).
Let's dive in.