Riverdeep swallows Houghton Mifflin
Irish educational software publisher Riverdeep (valued at £524m, 2005 sales of £173m) has effected a US$3.5bn (£1.8bn) reverse takeover of large US educational publisher Houghton Mifflin (2005 sales £629m). The subtext to this deal is venture capital that has been used to finance both companies. Riverdeep listed on NASDAQ and the Irish stock exchange in 2000 and, went private in 2002 with the backing of Alchemy Partners and MSD Private Equity. Similarly in 2002, Houghton Mifflin was snapped up from Vivendi for US$1.7bn (£838m) by Blackstone, Bain Capital and Thomas H Lee Partners. If the deal goes through at US$3.5bn this will give the VC firms a notional profit of almost US$1.9bn (£996m)!
The two main private investors in Riverdeep’s takeover are the clients of Irish stockbrokers Davy, who are putting up US$200m (£104m) and Saudi investment company Obeikan who are investing a similar amount. Citigroup and Credit Suisse will provide debt financing. Credit Suisse also advised Riverdeep when it went private in 2002 and in 2005 in conjunction with Davy underwrote a US$175m (£92m) payment-in-kind (PIK) note which vests in 2011. The market for PIKs has existed for many years and has blossomed in Europe with over €3bn (£2bn) of the instruments issued in the last 18 months.
Rather than paying out when the note falls due, PIKs payout in the form of additional loans or bonds. PIKs are a risky form of finance and if Riverdeep tanked Credit Suisse and Davey would likely be left with nothing; the upside is that recent interest rates for PIKs have been more than 13%, hence their appeal for private equity groups and hedge funds.
Riverdeep is seen by many as an Irish success story who clawed their way back from the dot bomb crash to become a major force in educational publishing. The reality is that Riverdeep’s renaissance probably owes more to the structural change in international capital markets and the rise of venture capital funds, than it does to cutting edge electronic publishing and software development.
It’s also a very clear signal that in the educational content market it doesn’t matter if you’re a giant like Reed Elsevier and Pearson or a minnow like Sherston or David Fulton; publishing businesses are now run by bean counters who couldn't sniff a bestseller at 10 paces.