Riverdeep bidding for Reed educational arm

HM Riverdeep, the educational publishing firm controlled by Barry O'Callaghan, has thrown its hat in the ring for the Reed Elsevier's educational publishing business, valued at €3 billion.

Sir Crispin Davis, Reed's chief executive, yesterday announced that the Anglo-Dutch publisher would be selling its Harcourt Education division after more than a year of falling revenues and profits stemming from errors and contract losses in its exam testing business.

A spokesman for Mr O'Callaghan would not comment, but sources said he was "very interested" in the potential cost savings and other benefits of combining Harcourt with HM Riverdeep, the vehicle with which he bought the larger Houghton Mifflin.

Mr O'Callaghan, who was backed by wealthy Irish individuals, Irish and Saudi institutional investors and a group of investment banks, is already believed to have contacted Reed's advisers at UBS, who are expected to issue an information memorandum within two months.

This week Riverdeep informed investors, via a hastily convened conference call, that its auditors, Ernst & Young, had resigned, citing "incorrect representations" over contracts.

The Harcourt auction, coming as Thomson Corporation and Wolters Kluwer are also selling their education assets, is expected to prompt interest from other bidders, particularly private equity-backed groups. Analysts expect regulatory constraints to dampen interest from competitors such as McGraw-Hill or Pearson, owners of the Financial Times. Sir Crispin said that the amount of money raised by private equity groups made it a "very positive environment" in which to sell.

Private equity groups are thought most likely buyers of the Thomson business, which specialises in college textbooks. Analysts estimated that Reed - which paid $2 billion for the business in 2000 - could reap between £1.6 billion and £2.4 billion from the sale, with most estimates closer to £1.7-£1.9 billion. Sir Crispin said that Harcourt would be sold debt-free, with all proceeds being handed back to shareholders, raising expectations of a one-off dividend of about 70p per share.

Reed's decision to exit education stemmed from a belief that its migration from print to online delivery was happening at a slower rate than its other businesses in legal, scientific and business publishing, Sir Crispin said, echoing comments from Thomson and Wolters Kluwer.