Riverdeep plans high-yield bond to raise $250m

Riverdeep plans to raise $250 million (€202 million) by issuing a high-yield bond as part of a debt restructuring package, which has been devised less than a year after management took the firm private.

The Dublin-based educational software company has also indicated that it will position itself for a trade sale or a stockmarket flotation within three years.

Riverdeep said yesterday it expected the bond would carry a coupon in the order of 9 per cent per year. It also plans to raise $75 million through loans, and $25 million for working capital requirements.

Credit Suisse First Boston, former employer of Riverdeep chief executive Mr Barry O'Callaghan, will underwrite the bond, the proceeds of which will be used to pay off existing debts.

The debt restructuring will see venture capital funds Alchemy Partners and MSD Private Equity, which backed last year's management buyout (MBO) of Riverdeep, double their investment.

Riverdeep's two biggest shareholders, Mr Pat McDonagh and Mr O'Callaghan, are exercising an option to buy the two firm's 32.9 per cent stake in Riverdeep, at a price of $2.34 per share.

The price, which was written into the MBO deal by Riverdeep, is considerably higher than the $1.51 per share price offered to Riverdeep shareholders at the time of the MBO in 2003.

Alchemy and MSD will also receive interest on a $108 million loan to the firm. Following the transaction, Alchemy should net $175 million with MSD netting about $41 million.

In a letter to shareholders yesterday, Mr O'Callaghan said that he and Mr McDonagh would spend up to $72 million to buy back most of the shares of the venture firms. The remaining shares will be made available to shareholders and other institutional investors in a process that is being co-ordinated by Davy Stockbrokers, which is also an adviser to the firm's bond issue.

In the letter, Riverdeep notes that equity markets have improved since the MBO and the valuation of peer companies in the US has risen significantly. The document includes an indicative valuation of $3.40 per share for Riverdeep, which was issued by Davy in a note last week.

The letter also discloses Riverdeep's 2003 results, which show $58.9 million in earnings before interest, tax, depreciation and amortisation, up from $29.8 million in 2002. The improved financial performance was boosted by an extensive restructuring plan, which cut staff numbers from 586 in December 2002 to 403 in December 2003.

Annual operating costs have been cut by $40 million, improving the firm's operating margin by more than 10 per cent.

However, turnover fell to $206.6 million in 2003, down from $210 million in 2002.

Riverdeep made a pre-tax loss of $52.7 million in 2003, up from $33.8 million in 2002. This reflected amortisation charges worth some $60.3 million in 2003.