Riverdeep debt mountain high

<p><em>Tom Tivnan writes:</em></p>
<p>Barry O'Callaghan, <a href="http://www.riverdeep.net">Houghton Mifflin Riverdeep</a> chairman and c.e.o., has splashed out once again, acquiring Reed Elsevier&rsquo;s Harcourt US schools business. This is just ten months after engineering a $ 3.9bn reverse takeover of Houghton Mifflin, that Scott Sperling, from private equity firm Thomas H. Lee Partners which helped with the deal, said was &quot;like a minnow swallowing a whale&quot;.</p>
<p>The HM Riverdeep/Harcourt business is now breathing down the neck of rivals Pearson and McGraw-Hill in the US. Not bad for a company that was floated on the NASDAQ in the year 2000 with assets of about $ 150m.</p>
<p>But Riverdeep's climb to the top of the education heap is not without a gamble. The two deals have been funded primarily by private equity funds and loans from investment banks. The company's debt is purported to be around $ 7.4bn and interest payments alone worth $ 400m a year. Last week, the credit ratings agency Moody's placed Riverdeep on a ratings review with a view to possibly downgrading their status, which was previously downgraded in May to B3, six grades below investment status.</p>
<p>The FT reported that nervous credit markets prompted some banks to walk away from providing debt for the Harcourt deal. Riverdeep and Elsevier were only able to complete the transaction with Elsevier agreeing to take $ 300m of the price in shares in the new company.</p>
<p>Still it is not exactly out of character for O'Callaghan to take a big risk. He became Riverdeep c.e.o. in 1999 at the age of 31, joining the then rather obscure Irish educational publisher from investment bank Credit Suisse First Boston. He brought the company public during the dotcom boom in 2000, and when the stocks slumped three years later, he rolled the dice, leading a venture capital backed m.b.o. He now owns 46% of the shares which wlll reduce to 38% when the Harcourt acquisition becomes final. In this year's rankings of the richest people in Ireland by the Sunday Times newspaper, O'Callaghan came 48th, with the paper estimating that he stake was worth more than &pound;179m.</p>
<p>Whatever is to happen next it seems unlikely that Riverdeep will remain as it is.</p>
<p>Both the debt and private equity investors who demand their pound of flesh might force a sell-off or a break-up of the company. Conversely, some analysts think that Riverdeep will look to expand even further, perhaps targeting McGraw-Hill in a bid to knock Pearson off its US perch.<br />
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If I were a gambling man, I would be inclined for the latter. O'Callaghan seems to have firmly staked his claim in the education sector and is nothing if not ambitious. Crucially, he&nbsp; has the ability and imagination to make complicated deals come together. I wouldn't bet against him.</p>