Cengage/McGraw Merger Subject to 90% Lender Consent Threshold, Coupon Boosts Only Paid At Merger Close

The proposed merger of Cengage and McGraw-Hill Education is subject to approval by 90% of lenders, and if the threshold is not reached, the deal would be canceled, according to sources familiar with the situation.

Lenders to Cengage and McGraw-Hill who consent to amendments to the companies’ existing senior secured credit facilities in connection with the proposed merger would be paid a 25 basis point consent fee at the time that the amendment becomes effective, according to sources familiar with the situation. Additionally, the 100-bps coupon boost being offered to McGraw-Hill lenders and the 75-bps coupon boost being offered to Cengage lenders would only become effective if the merger closes, the sources said.

According to a May 1 management presentation, the “merger of equals” is expected to close by early 2020, subject to customary closing conditions, including receipt of regulatory approvals. Cengage disclosed in a lender presentation this morning stating among other things that the merger is subject to satisfaction or waiver of a number of conditions including “the absence of any law or order prohibiting consummation of the merger or requiring divestiture of either party’s assets that produced net revenue in excess of $175 million during the 2018 calendar year.” This morning’s presentation also showed that the company plans to use $8 million of cash from its balance sheet to pay for merger amendment consent fees, and $25 million for estimated transaction fees and expenses.

Representatives for McGraw-Hill and Cengage did not immediately return email and telephone messages for comment.