O'Callaghan is poised for deal on debt/equity swap
EMPG to restructure €5.1bn debt pile and cut its €550m annual interest bill
EMPG chief Barry O'Callaghan is restructuring the publishing giant's balance sheet, thereby diluting his 38pc shareholding
Barry O'Callaghan's Education Media & Publishing Group (EMPG) is on the cusp of finalising a massive restructuring of its balance sheet, which will see holders of a chunk of its $7bn (€5.1bn) debt turn their exposure into equity.
The deal, which will lead to a significant dilution of the Cork-born entrepreneur's 38pc stake in the publisher, is set to be unveiled within the next couple of weeks, according to market sources.
Interest bill
It will also shave a slice off its estimated annual €550m cash interest bill. The company declined to comment.
Mr O'Callaghan formed EMPG through the $5bn merger of his Riverdeep e-learning company in 2006 with US school textbook group Houghton Mifflin (HM), and their subsequent $4bn acquisition of Harcourt Education in America from Reed Elsevier.
It stands as one of the world's biggest publishing powerhouses. But its debt-laden capital profile, while supported by very strong cash flow and up to $300m of synergies from the HM and Harcourt tie-up, has been out of favour in the ongoing turmoil in the financial markets. The second merger was unveiled just weeks before the subprime crisis erupted in August 2007.
Following a succession of credit downgrades over the past year, as Moody's and Standard & Poor's took a dim view of its "unsustainable" capital structure, EMPG decided recently to pull from the rating system.
The group took issue with the downgrades, saying it was in full compliance with all of its financial covenants and does not have to refinance its debt before 2014.
However, O'Callaghan managed two months ago to get lenders to relax covenants on EMPG's $4.3bn senior debt. He has been advised throughout the process by investment banks JP Morgan and Credit Suisse, where he previously worked as a banker.
Accommodating
Apollo, BlackRock and Guggenheim Partners, who control the senior debt, eased the demand that EMPG's debts be no more than 8.75 times earnings before interest, tax, depreciation and amortisation (EBITDA) at the end of March to a more accommodating 9.95 times.
Covenants for the following four quarters were also widened.
EMPG is understood to have posted a 20pc jump in EBITDA last year to $750m and is budgeting for a similar pace of growth this year, to about $900m.
It is believed that the holders of the senior debt securities will participate in the debt-for-equity swap. However, the main focus of negotiations has surrounded the group's $1.7bn of second-lien loans, which ranks behind a traditional senior credit facility in terms of security.
In recent months, the group pulled the sale of its Trade and Reference Publishers unit, publisher of literary giants Philip Roth and Gunter Grass.
O'Callaghan is also reported to have turned down a bid by German media group Bertelsmann to invest about $300m of new equity into EMPG.
Meanwhile, a debt-for-equity swap will also dilute the 11.8pc stake Reed Elsevier took in EMPG as part payment for its Harcourt unit. At the end of last year, the Anglo-Dutch publisher slashed the value of its holding, which was originally worth $300m, to €15m.
- Joe Brennan
