* Apollo Global Management buys education business
* Price called fair, though less than McGraw-Hill had wanted
* McGraw-Hill shares close 0.4 pct higher (Adds advisers, updates shares)
By David Henry
Nov 26 The McGraw-Hill Companies Inc has found a buyer for its textbook business, a unit that once steadied its results against the ups and downs of financial markets faced by its Standard & Poor's rating agency.
Private equity firm Apollo Global Management LLC will buy McGraw-Hill's educational publishing unit for $2.5 billion, McGraw-Hill said on Monday.
The price, while less than the $3 billion McGraw-Hill had hoped for earlier, was fair given recent strains on the business and the uncertainty of evolving digital publishing formats, analysts said.
McGraw-Hill expects to record a non-cash impairment charge of about $450 million to $550 million in the fourth quarter to mark down the value of the educational unit.
"Investors should be happy with $2.5 billion," said independent analyst Craig Huber of Huber Research Partners in Greenwich, Connecticut.
McGraw-Hill stock closed up 0.4 percent at $51.89, while Apollo shares slipped 0.4 percent to $15.27. McGraw-Hill shares, which often move with the outlook for new bond issues that will be rated by its Standard & Poor's unit, are up about 15 percent this year.
New York-based McGraw-Hill is the second-largest educational publisher in the world, selling texts for elementary and high school students, as well as to university students and professionals.
The education company's elementary and high school revenue have been falling with spending cutbacks by state and local governments for textbooks. At the same time the company is grappling with the cost and uncertainty of changing over from paper to digital delivery of its content, which is affecting the college textbook market as well, Huber said.
In years past, the textbook business was seen as more predictable than the market-sensitive ratings business because company executives could count on demographic trends and budgeting by school systems to forecast demand.
But the collapse of house prices, from levels that in the mid-2000s were inflated partly by faulty ratings by Standard & Poor's on mortgage-backed bonds, continues to depress local tax revenues that pay for textbooks.
At the same time, McGraw-Hill, like other publishers, has been under pressure to adapt its content to digital delivery. Textbooks that offered publishers great economies of scale with long production runs are giving way to the need to create many different kinds of digital packages assembled with smaller chunks of information.
While such transformations hold the potential to ultimately reduce costs, they are also requiring massive changes in what employees do and how products are sold.
"They need to build the container itself," said Ned May, an analyst at Outsell Inc, a research and advice firm for the publishing industry.
May said the deal "came in at a fair price" for both sides.
McGraw-Hill announced in September 2011 that it would separate its educational and financial services businesses as part of a stepped-up push to increase returns to shareholders. The restructuring plan was announced after institutional investors, including Jana Partners LLC and the Ontario Teachers' Pension Plan, argued that the company would be worth more if split up.
McGraw-Hill's remaining businesses, besides Standard & Poor's, include Capital IQ tools for financial analysis and Platts, a vendor of commodity market information.
McGraw-Hill plans to keep those businesses together as McGraw-Hill Financial. Together, they will make a "pure-play" for stock investors on financial information, according to analyst Peter Appert of Piper Jaffray & Co.
McGraw-Hill said it will realize $1.9 billion of proceeds from the deal, after taxes and certain adjustments. It plans to use the money to buy back its shares, make "selective tuck-in acquisitions" for its portfolio of financial services businesses and repay short-term borrowings. The company did not disclose how much the sale will cost in taxes.
McGraw-Hill originally discussed spinning off ownership of the educational business to its shareholders. However, after reducing staff in the business and doing much of the work to legally divide the company, the board moved to consider bids from private equity firms to buy it outright.
By the beginning of August, at least three private equity firms had submitted initial bids to McGraw-Hill and sources said then that the company might get around $3 billion for the unit.
It is better for McGraw-Hill shareholders to get the certainty of the sale rather than receive shares in a company trying to find its way in a harsh and changing landscape for educational publishers, Huber said.
Private equity firms have bought textbook publishers before. In 2007, Cengage, the No. 2 U.S. college textbook publisher, was acquired by Apax Partners LLP and OMERS Capital Partners from Thomson Corp, now known as Thomson Reuters , for about $7.75 billion in cash.
McGraw-Hill received financial advice from Evercore Partners and Goldman, Sachs & Co., and legal advice from Wachtell, Lipton, Rosen & Katz and Clifford Chance.
Apollo's financial advisers included Credit Suisse, UBS Investment Bank and BMO Financial Group. It received deal financing from Credit Suisse, Morgan Stanley, Jefferies, UBS Investment Bank, Nomura and BMO.
Apollo received legal advice from Paul, Weiss, Rifkind, Wharton & Garrison LLP and Morgan, Lewis and Bockius LLP. (Reporting by David Henry in New York and Sharanya Hrishikesh in Bangalore; Editing by Maju Samuel, Alden Bentley, Steve Orlofsky and Tim Dobbyn)