Shareholders in Barry O'Callaghan's highly indebted Education Media and Publishing Group (EMPG) face virtual wipeout of their investments as bondholders behind $6.6bn (€4.5bn) of its debt have moved to take control of the group.
The group insisted last night that a deal "will put the company on a stronger financial footing for the future", and have no effect on its day-to-day operations or 6,000 employees.
Sources said current negotiations centre around holders of $1.8bn of junior debt and a large portion of $4.8bn of senior debt in EMPG converting their exposure into equity.
It is also understood that bondholders have agreed for delay a bond interest payment, due today, to the end of this month.
Mr O'Callaghan formed EMPG through the $5bn merger of his Riverdeep e-learning company in 2006 with US textbook group Houghton Mifflin (HM), and their subsequent $4bn acquisition of Harcourt Education in America from Reed Elsevier.
The second takeover, which catapulted it to position of top textbook publisher for schoolchildren from kindergarten to grade 12, was struck just weeks before the financial markets went into a tailspin in August 2008 after the US subprime crisis erupted.
High-rolling investors in Davy and O'Callaghan had already seen their stakes diluted by 45pc late last year as a group of EMPG's junior debtors swapped $1bn of its $8bn debt mountain for equity.
Clients of Davy, including former Anglo Irish Bank chairman Sean FitzPatrick and financier Domhnal Slattery, built up a 15pc stake in the business as they participated in two equity-raisings to back each of the deals -- totalling more than $400m.
It is understood that Davy, which also operates a grey market for EMPG shares, wrote down the value of its clients' $10-a-share investments to just €1 a piece late last year.
These have now been told that their equity, which was diluted to 8.5pc following last year's restructuring deal, is likely to be worthless following a new deal. Mr O'Callaghan, who saw his 38pc stake shrink to 20.9pc as a result of the first overhaul, also faces having his stake slashed to zero.
While speculation was rife in debt market circles yesterday that Mr O'Callaghan will be forced to step down once the new restructuring package is agreed, the group insisted last night that he and other senior managers will remain at the helm.
Hedge fund guru John Paulson, who has emerged as one of the biggest bondholders pushing for the deal, spoke yesterday of having "great admiration" for Mr O'Callaghan and his team.
Shareholders that supported Mr O'Callaghan's move in 2003 to buy Riverdeep off the stockexchange are similarly hit. EMPG, which moved its headquarters to the Cayman Islands, warned shareholders last year that failure to back its debt-for-equity swap deal could lead to the group filing for bankruptcy protection.
Its debt ratings carried a "junk bond" status prior to EMPG pulling from the credit ratings system.
Mr O'Callaghan is understood to be a large personal customer of Anglo Irish Bank. Fine Gael TD George Lee yesterday said Irish taxpayers could be left exposed because a number of investors in the company have large loans from the nationalised group. "As a company, Houghton Mifflin Harcourt was a highly leveraged operation and had very significant banking commitments," said Mr Lee. "It appears that its Irish equity investors will lose all of their investment as a result (of the restructuring)." EMPG confirmed yesterday that it was "in advanced discussions regarding a comprehensive, consensual balance sheet restructuring".
It said the majority of the group's most significant lenders have agreed to the framework for the plan, which, it said, "will put the company on a stronger financial footing for the future".
It insisted its lenders have committed "to make substantial new investments in the company in connection with this restructuring", and that the plan would give the company over $600m of new working capital to support it. Hit as cash-strapped US states delayed textbook orders, the group failed to achieve anything near its projected 20pc earnings growth for last year, sources said. Some suggested profits were down on the $750m for 2008.
EMPG's banking covenants were relaxed twice in 2009. Some sources expressed surprise about the timing of the new restructuring talks, as it is understood EMPG did not face another test on its covenants in the middle of this year. Last year's refinancing saw the now stricken Dubai World become a new significant shareholder.