'It slightly bemuses me that I'm being positioned as the bad guy'
Barry O'Callaghan: put together the $4.95 billion takeover of 160-year-old publisher Houghton Mifflin in 2006. This and another takeover left his Cayman Islands holding company EMPG with debts of $8 billion. When the US education market slumped last year, it soon became clear "the sums didn't work".
Though EMPG’s restructuring will wipe out the stake of its Irish investors, Barry O’Callaghan says he is taking the brunt more than anyone else
AT SOME point today Barry O’Callaghan will arrive back into Ireland from the UK with a large bone to pick with Fine Gael TD George Lee.
On Wednesday, the former RTÉ journalist sparked a media frenzy by issuing a statement claiming that Houghton Mifflin Harcourt, EMPG’s operating company, had “failed” with a number of Irish investors, put in by Davy, left high and dry.
It forced EMPG to issue a statement confirming that it was in talks with its backers to restructure the business and reduce its massive $7 billion (€4.8 billion) debt pile.
The Davy clients invested $170 million between them in 2006 and will effectively see their stake wiped out when the restructuring is completed in the next few weeks.
In a telephone interview with The Irish Timesyesterday, O’Callaghan said this is “unfortunate” but the global economic meltdown of the past 18 months changed the rules of the game.
“I’m taking the brunt on that more than anyone else and it slightly bemuses me that I’m being positioned as the bad guy,” he said. “It’s just bad luck for me and my fellow shareholders. It’s nothing different from the people who bought houses [in the boom].”
To recap, O’Callaghan was the architect of two enormous corporate deals in the past four years that turned Irish e-learning company Riverdeep into the biggest player in the lucrative US education publishing market.
O’Callaghan, a former whizz kid investment banker, put together the $4.95 billion takeover of 160-year-old publisher Houghton Mifflin in 2006 and followed it a year later with the acquisition of rival Harcourt from Reed Elsever for about €4 billion.
Cayman Islands-based EMPG was formed as the holding company and saddled with a debt of $8 billion.
As O’Callaghan tells it, everything was on target until August 2008, when spending by US states on education textbooks fell off a cliff.
“Through to August 2008, almost a year after we cut the deal with Harcourt, for the first eight months of 2008 we were a country mile ahead of all of our financial targets,” he says.
“At the heart of what’s happened here is that our customers have got real financial constraints. Our biggest customer is the state of California and the state . . . has a massive, massive state deficit. It’s cutting budgets left, right and centre, including healthcare and education.
“In education, to protect jobs, they’ve particularly cut discretionary spend in other areas, particularly textbooks.”
O’Callaghan says he left no stone unturned in a bid to turn things around and protect the equity holders.
A refinancing was completed in 2009 that shaved about $1 billion off its debt. Consultants McKinsey were brought in to evaluate the business model and O’Callaghan undertook a lengthy roadshow in the US.
“I did a three-month customer roadshow and went to see every governor of all the key states in which we are in business. In every way the message was consistent – state budgets were being massively cut.”
A €70 billion stimulus from the Obama administration for the K12 (kindergarten to 12-year-old) marketplace, failed to help.
“I thought ‘great’ maybe this will bail us out but the reality is that it took much longer for this money to flow and when it did flow it backfilled teacher jobs,” O’Callaghan explains.
“It didn’t go to the instruction and materials market, which is our market.”
EMPG is a private company registered in the Cayman Islands and doesn’t disclose its financial information publicly.
O’Callaghan said revenues were about 25 per cent off in 2009 on budgets.
The company’s earnings before interest, tax, depreciation and amortisation were projected to hit $1.07 billion last year but collapsed to around $500 million.
“But unfortunately that’s not a number that could sustain the amount of debt we had,” he explains. “We didn’t expect the market to decline because it wasn’t supposed to. California was supposed to buy books last year but they couldn’t afford them so they didn’t.”
EMPG’s interest payments are an eye-watering $700 million a year so the company was in trouble when the US education market slumped last year. “The sums didn’t work,” O’Callaghan admits.
This has led to the latest restructuring, which will shave about $4 billion off EMPG debt and leave it borrowings of about $3 billion. It will also gain $600-700 million in new working capital from the deal.
O’Callaghan wouldn’t say who is supporting the new funding arrangement but respected hedge fund operator John Paulson has already publicly committed to the plan.
Paulson & Co will own more than 30 per cent of the newly restructured EMPG.
“The restructuring will happen, there’s no equivocation to this,” O’Callaghan said confidently. “Sometime in the next two to three week we will formalise all of this.”
When EMPG was constructed, O’Callaghan owned 38 per cent of the business. When the restructuring is completed his shareholding will be “zero”.
“I’ll be the guy running the business hoping to build the long-term value of the business and hoping through some sort of [share] options plan, that I haven’t even negotiated yet, to get some upside from it as I try and create recovery and values.”
He insists that he retains the confidence of EMPG’s backers. “If that weren’t the case then I would not be getting employed by the creditors who are about to become my principal stakeholders. They’d be deciding I was not the right man for the job.”
O’Callaghan insists he doesn’t regret buying Houghton Mifflin and Harcourt and merging them with Riverdeep. But he wishes he hadn’t paid so much.
“In retrospect, did we overpay for these assets? Of course we did,” he says.
“But then again, that’s not a story you can blame me for. The whole world overpaid for assets back in 2006 and 2007 and nobody anticipated what would happen to the world.
“The bottom line is that what we paid at the time were the appropriate market prices. We only paid what the public company equivalents were trading at. We didn’t pay big premia.”
“You’re never going to get me to concede that this was anything other than bad timing, and, frankly, bad luck.”