Riverdeep flotation set to value group at $500m

Riverdeep, the educational software group which began life as a spin-off from CBT Systems (now Smartforce) is set to be valued at up to $500m (€508 million) when it is floated on the Nasdaq and Dublin stock markets next month.

Riverdeep intends to float about 25 per cent of the company and raise up to $100 million in the flotation. No existing shareholders will be selling shares into the initial public offering (IPO), sources close to the company have indicated.

If the company is successful in the flotation, founder director Mr Pat McDonagh - whose current 66 per cent stake will be diluted to about 53 per cent - will own shares worth $265 million.

The flotation will follow an information road-show which begins next week.

Mr McDonagh, a former primary schoolteacher, was one of the founders of CBT and netted $45 million shortly after CBT was floated on the Nasdaq market in 1995. He is also chairman of Rapid Technology, the Dublin company which develops point-of-sale terminals and whose shares have quadrupled in past two months in anticipation of a multimillion deal with IBM. Mr McDonagh's stake in Rapid is currently worth €28 million.

Chief executive Mr Barry O'Callaghan, who only joined Riverdeep a year ago, will have a diluted stake of just over 7 per cent and shares worth around $46 million. The other shareholders are other founder-directors and employees, who currently hold 11 per cent, as well as institutional and private clients of Davy Stockbrokers who bought 14 per cent of the company last October for $15 million.

These groups will suffer substantial dilution from an IPO of 25 per cent of the company but, at a $500 million valuation, their diluted stakes are still worth $44 million and $56 million respectively. This would give the investors assembled by Davy a huge gain on their investments of last October.

The allocation of the 20-25 per cent of the company being floated between Nasdaq and Dublin will only be decided after an institutional road-show. Davy is handling and underwriting the Irish end of the flotation, with the Nasdaq offering being underwritten by Credit Suisse First Boston, Donaldson Lufkin & Jenrette and WitCapital.

So far, Riverdeep has made a preliminary filing with the US Securities and Exchange Commission (SEC). A second filing, detailing the anticipated price range of the shares and the number to be offered, is expected to be placed next week to coincide with the road-show. The final pricing of the IPO will be decided after the road-show and Riverdeep shares are expected to begin trading in mid-March.

Given the current appetite for technology shares, analysts expect a receptive market for Riverdeep and there is likely to be strong demand from Irish institutions, which have previously shown little interest in the booming Irish technology sector.

The prospectus filed yesterday with the SEC states that Riverdeep's CD-ROM products have been installed in 5,000 US schools and that 500,000 students subscribe to Riverdeep's products over the Internet.