EMPG restructuring dilutes investors' shares by 45%

A FINANCIAL restructuring at Education Media Publishing Group (EMPG), formerly known as Houghton Mifflin Riverdeep, has diluted by 45 per cent the shareholdings of private Irish investors and Claret Capital, the Dublin-based private equity group.

The dilution follows a debt for equity deal this month in which the highly-leveraged EMPG reduced its $7 billion debt burden and cut its annual interest costs.

The manoeuvre cut the shareholding of company founder Barry O’Callaghan to 21 per cent from about 38 per cent.

Private clients of Dublin stockbroker Davy injected some $200 million into the then HM Riverdeep in 2006 when the Irish education technology company Riverdeep executed a $4.95 billion reverse takeover of US publisher Houghton Mifflin.

EMPG was formed a year later when HM Riverdeep bought out Reed Elsevier’s US education arm Harcourt in a $4 billion deal.

The business is under pressure due to big cuts in school budget spending in the US.

According to Claret founder Domhnal Slattery, himself an EMPG director, the result of that pressure is that earnings before interest, tax, depreciation and amortisation (Ebitda) are coming in at “quite a bit less” than the projected €1 billion per annum.

“Budgets are off 20-30 per cent in terms of what the states are spending. It directly correlates to our Ebitda. The volatility in that business if you look back at the last 20 years is about 2 per cent,” he told The Irish Times.

The “ray of hope” was that the Obama administration’s economic stimulus package had about $10 billion earmarked for textbooks, he added.

Some $800 million of EMPG’s debt is being exchanged for equity in the restructuring deal, while interest payments on $1.7 billion of the debt are being suspended in return for a bigger payment later on.

This cuts $100 million from a $500 million annual interest bill for the company.

The Davy investors see their stake drop to 5.5 per cent from 10 per cent as a result.

“Davy represent small shareholders owning approximately 10 per cent of the company and they are diluted by 45 per cent, as are all shareholders.

“This dilution level is low compared to other similar deals where debt becoming equity normally gets control,” said a spokeswoman for EMPG.

Claret invested $50 million in EMPG. Mr Slattery said a loosening of debt covenants gives EMPG headroom in the near-term.

“It’s less leveraged than it was. It was leveraged at about seven times Ebitda, which would have been about right in its peer group in the heyday,” he said.

EMPG is Claret’s second-biggest investment.

Mr Slattery said the investment thesis at the time was “spot on” but “who could ever have foreseen that the US federal states would stop buying textbooks, literally?”