Buyout of publishing group is on track, writes Arthur Beesley, Senior Business Correspondent
It was an occasion for only the financial elite, members of the millionaire club who have ready access to cash and a certain appetite for risk.
About lunchtime last Friday, about 150 people gathered in a large room at the Four Seasons Hotel in Ballsbridge, Dublin, to hear of a big-league investment proposal from Riverdeep, which was hoping to raise no less than $200 million (€157.85 million) to part-fund a huge acquisition.
Barry O'Callaghan, chief shareholder in the education software firm, was in talks to buy out Houghton Mifflin, a venerable Boston publisher of schoolbooks and academic tomes whose wares can be found in the best of libraries.
Most of the financing was in place for a transaction that will be worth more than $4.5 billion, but O'Callaghan needed yet more money to bring home the deal.
Enter Davy Stockbrokers, the biggest of Dublin's brokers which has easy access to the wealthiest of private clients.
Some of those were already investors in Riverdeep, which O'Callaghan had taken off the Nasdaq in 2003. The company had floated at the very height of the dotcom frenzy in 2001 only to see its share price fall as investors moved their funds off-line.
Amid great secrecy last week, Davy called its most prosperous clients and other high net worth individuals to the Four Seasons. Attendees were obliged to sign a confidentiality clause and each was given a Davy research paper which outlined the broad parameters of the proposed transaction.
Those at the meeting were told there was a minimum investment limit of €1 million. Such a sum may be notional. While not all the money will come in such large chunks, the deal is not for novices. By any standards, however, the investment returns that O'Callaghan mooted are extraordinarily ambitious.
The businessman is understood to have told prospective investors that the deal represented an opportunity to double their money in two years through revenue and cost synergies. A flotation on the public markets is on the cards in two or three years.
If that doesn't happen, O'Callaghan proposes to refinance the company and initiate a share buyback at twice the offer price.
These are big commitments, but those at the Four Seasons meeting bought the proposals.
Early this week, the fund-raising was said to be proceeding well. By yesterday afternoon, the $200 million placing by Davy was said to be "significantly oversubscribed".
Thus O'Callaghan is well on track to raise the biggest amount of equity issued to date for a private deal in Ireland.
There is more. Riverdeep is not quite a dotcom also-ran, but neither is it an international colossus.
The Houghton Mifflin deal, which values the 174-year-old publisher at $3.33 billion, will change that in an instant. The Boston company is already the fourth-largest education publisher in the US, but it has no significant internet presence.
A tie-up with Riverdeep would create a rival to international groups as large as Pearson, McGraw Hill, Reed Elsevier's Harcourt division and Canadian group Thomson.
While Riverdeep has made no public comment on the transaction, there are three strands to the investment rationale for the deal: industrial, strategic, and financial.
From the industrial perspective, the merged group would be a one-stop-shop for books and online educational material.
From the strategic standpoint, a deal would provide immediate access for each company to the other's material.
The sales teams at both companies would also be combined, radically increasing their strength and opening up the potential for cost-saving synergies.
Financially, the deal is designed to take particular advantage of the huge public expenditure in the US public on schoolbooks and educational material.
So will it work? At one level, O'Callaghan has already convinced the people who really count, investment banking institutions as eminent as Goldman Sachs, Citigroup and Credit Suisse First Boston, to provide debt facilities of $3.136 billion to finance the deal. Without them, O'Callaghan would be going nowhere.
But he will pay steeply for Houghton Mifflin, which was valued at only $1.6 billion when private equity groups Thomas H Lee, Bain Capital and Blacksone acquired it from Vivendi Universal in 2002.
For sector analyst Paul Gooden at ABN Amro in London, the current valuation is indeed high. "Back in 2001, when Reed Elsevier bought Harcourt, they ended up paying $4.5 billion and the sales multiple was 2.7 times historic sales," he says.
"Looking at Houghton Mifflin's sales in 2005, this deal if it's for $3.33 billion is 2.6 times historic sales. The media sector has derated significantly in the last five years . . . I think it's a pretty punchy multiple."
Still, Gooden said the cycle of US public purchasing in 2007 and 2008 was likely to be much stronger than this year's "lumpy" performance. Such a trend provides potential for corporate growth, the true test of any big transaction.
In a note this week, the credit rating agency Standard & Poors observed that both Riverdeep and Houghton Mifflin were highly leveraged with rapidly accreting payment-in-kind notes in their capital structures putting pressure on their financial management strategies.
While citing the challenge in integrating the two groups, Standard & Poors said there might be some benefit from replicating the success of Riverdeep's director school sales and product management across a combined group.
"The ratings on both Houghton Mifflin and Riverdeep could be lowered if it becomes evident that the combined operating cash flow base cannot provide debt service coverage for consolidated earnings comparable with levels seen at both companies so far."
In Ballsbridge last Friday, O'Callaghan took a big stride towards completion of his most ambitious deal yet.
If the transaction goes through, his dream of making a global giant of Riverdeep will dominate his life for years to come - and his investors will be waiting to see whether he delivers on that most attractive of propositions, the chance to double the money in two years.
Now for the hard part.
