Business Opinion/Arthur Beesley:HM Riverdeep investors meet in Dublin today to sign off on the move of the organisation's main holding company to the Cayman Islands, an offshore jurisdiction. Consent for the change is already in the bag, so the meeting is a formality.
Only seven months after education software firm Riverdeep executed its mammoth reverse takeover of the venerable US publisher Houghton Mifflin, the move marks a departure from the script for the enlarged group.
The $4.95 billion (€3.63 billion) transaction was the second-biggest deal by an Irish company to date. The arrangement was financed with $3.14 billion in debt from Credit Suisse and Citigroup and $350 million in preferred equity.
A number of Davy Stockbrokers clients provided $300 million of $660 million in new equity from private investors. Riverdeep shareholders provided $600 million and cash balances of $160 million were also utilised.
While there is no tax on business profits in Cayman, HM Riverdeep says it is not moving its tax base there, instead the manoeuvre is designed to provide greater scope to make distributions to shareholders.
HM Riverdeep has in mind a dividend recapitalisation, a process often utilised in the private equity world. The company would take on new debt to fund a special dividend for investors or buy back their shares. HM Riverdeep won't quantify the scale of the recap it plans, but says it can think about such a move because the business is trading well.
The company has told investors that the move to the Cayman Islands is required because the definition of profit there is much broader than in Ireland, and allows for "greater flexibility" in making distributions from share capital subject to limited restrictions.
"Irish law largely restricts companies to make such distributions out of realised profit less realised losses," the company said in a note to investors.
The biggest beneficiary of such a process will be Barry O'Callaghan, the Riverdeep chief who was the driving force behind the Houghton Mifflin deal last November. He is the dominant shareholder in the new group, owning about 47 per cent of HM Riverdeep.
O'Callaghan paid for 25 per cent of the group by rolling over his Riverdeep shares and investing $200 million in new money. He was also the main beneficiary when an additional stake of about 20 per cent of HM Riverdeep was transferred free of charge to top managers in Riverdeep as a "promoter and management incentive".
This was put in place instead of a share option scheme as a lock-in for O'Callaghan and his most senior colleagues. Davy's well-heeled clients will duly receive their share of the action
While the scale of the dividend recap remains unknown, they are unlikely to refuse a return of some money. However, in an organisation that is already shouldering $3.4 billion in debt, loading additional debt into the business will only increase the risk in the investment.
They were told, remember, that the merger represented an opportunity to double their money within two years, and that the new entity would list on the public markets within two or three years.
In that context, taking on new debt for a near-term special dividend or share buyback might well reduce the valuation of the business when it comes to be sold. Taking on new debt for reinvestment or an acquisition would add value by increasing earning potential. No matter how good trading is, the addition of debt for a dividend recap will suck money out of the company and increase its interest burden.
Against that stands the argument that revenue and cost synergies - and lower taxation in Ireland than in the US - will deliver a significant uplift in the value of the business.
Whatever happens, HM Riverdeep says the regulatory regime in Cayman is "less onerous" and that the company will enjoy greater confidentiality there over its affairs. While that was not embraced in the original deal, the company has promised to appoint auditors in Cayman, provide investors with an annual update and convene an annual meeting. Accounts will be filed in Dublin for any Irish companies, the group says.
HM Riverdeep has been mightily busy. The group pondered a bid for Harcourt Education, Reed Elsevier's education arm, and was briefly in the race for Wolters Kluwer's education business.
In February, Ernst & Young resigned as auditor over "incorrect representations" about a US deal. The company said it had taken corrective action and that the issue led to an immaterial adjustment to its 2006 accounts.
In HM Riverdeep, there's rarely a dull moment.
