Business Irish

Saturday 21 April 2018

Debt-laden publisher is now a wage slave

Barry O'Callaghan, one of Ireland's genuine 'masters of the universe' has taken a tumble, writes Nick Webb

BARRY O'Callaghan bet the ranch and lost big time. The Clongowes-educated financier was briefly worth "well north of a billion" before he was 40. Ever so briefly. Now with the implosion of his debt-laden publishing firm EMPG he is back to being an ordinary wage slave.

Last week, after weeks of dismissing suggestions that the company was facing major financial restructuring, EMPG admitted it was in discussions with its lenders to rescue the business. O'Callaghan was, at a stroke, close to $1bn (€700m) poorer as his shareholding was erased.

A $8.95bn debt-fuelled acquisition splurge completely transformed his company Riverdeep, which originally provided educational materials on computers, into one of the biggest publishers in the world. The former Credit Suisse banker, part of a Cork medical family, has spent the last decade at the helm of was seen as one of Ireland's biggest corporate success stories. It made O'Callaghan enormously rich and did the country no harm either as he remained a tax resident here. "I've paid tens of millions of dollars worth of tax," he said last week.

The former Nasdaq-listed Riverdeep, or EMPG, as it became known, spent $4.95bn buying publisher Houghton Mifflin in 2006 and a further $4bn buying Harcourt in July 2007. Despite O'Callaghan's bullish statements, the timing sucked. The credit crunch saw the debt markets freeze over in July 2007. EMPG was always going to be in big trouble unless things recovered.

A big mountain of debt was just about manageable if the money kept rolling in. Interest payments were about $700m per year. Sources close to the company have indicated that EMPG was forecasting profits of $950m this year but may only hit about 50 per cent of that.

Crucially, one of its major clients -- the state of California -- plummeted into financial crisis and massive budget deficit. Governor Arnold Schwarzenegger announced the state would no longer be buying school books. Twelve other US states slammed into a similar financial crisis.

In a matter of months, the major part of EMPG's business had evaporated. Profits were going to come in at about half of the forecast levels. This caused lending covenants on its $7bn loan mountain to creak loudly. Payment on a bond due last Wednesday has now been deferred until the end of the month. This prompted a flurry of activity between EMPG and its lenders and bondholders.

Having been forced off the stockmarkets by hedge funds in 2002 through aggressive shorting of Riverdeep stock, O'Callaghan has found himself squeezed by "hedgies" again. Under the complex refinancing deal, which essentially sees large chunks of its debts converted to shares as well as a major cash injection, bondholders behind $4bn of its debt are moving to take control of the company.

O'Callaghan will see hedge fund boss John Paulson -- who made billions by betting against sub-prime mortgages -- and other Wall Street outfits become the dominant shareholders in the business.

O'Callaghan remains at the tiller at EMPG, having been given a vote of confidence by Paulson and other investors. However, the debt crisis has all but wiped out O'Callaghan's stake in the business. At one stage he was considered to be a "paper" billionaire, but those estimates are unlikely to have included personal and corporate debt calculations.

If he continues with EMPG, O'Callaghan is likely to seek some form of share option scheme in a bid to make some of his fortune back.

But apart from O'Callaghan and his key lieutenants in EMPG, hundreds of well-heeled Irish investors have also seen their investment blow-torched.

Stockbroking clients were hard hit, dropping up to $170m. Domhnail Slattery's Claret Capital is said to have put over €52m into the business. Former Anglo Irish chairman Sean FitzPatrick is understood to have invested up to €5m, while Senator Feargal Quinn and his family are said to have invested €16m .

The investors are left with EMPG's international business, which has operations in Colonel Gadaffi's Libya and in China.

They may also get some form of warrants over the US business.

Last week Fine Gael TD George Lee was first out of the traps to suggest that O'Callaghan was a major customer of the now nationalised Anglo Irish Bank. This meant the State and taxpayer were now exposed to O'Callaghan's sizeable borrowings.

He borrowed heavily to maintain his stake in EMPG through a series of private fund raising and shareholder changes. In 2007, he spent $120m to buy out founding shareholder Pat McDonagh's stake in the business. He also invested €30m in a cash call that year. It was reported that he had borrowed close to €100m from Anglo to fund his personal shareholding.

Last Friday, a spokesman for O'Callaghan dismissed suggestions that he could owe over €200m to Anglo in personal and non-recourse loans.

O'Callaghan has declined to talk about figures, but last week he indicated that he would be honouring all the terms and commitments of his loans arrangements with Anglo. "I'm not broke, I'm perfectly solvent. Of my various investments, some of them are up and some of them are down," he said. The former Munster minor handball ace is also on the hook to Bank of Ireland Private Banking and AIB over a number of property deals, including the €20m Cliff House Hotel he developed in Waterford. He has lent nearly €3.6m to the hotel company Valshan.

Outside EMPG, O'Callaghan invested in a number of sectors that have bombed out spectacularly with the economic carnage. Highly leveraged private equity deals, property, hotels and retail have also been hurt.

O'Callaghan is one of the main supporters of celebrity chef Richard Corrigan's Bentley's Oyster Bar in Bentley's Hotel on St Stephen's Green.

The Corkman ploughed money into Domhnaill Slattery's boutique investment group Claret Capital at the height of the boom. Slattery invested in some of the raciest private equity deals going.

The Sunday Independent has learned that O'Callaghan was an investor in Merrill Lynch's $615m buyout of Pizza Hut franchise owner NPC. CPL boss and former Anglo Irish Bank director Anne Heraty's family also backed this deal.

O'Callaghan was also involved in the Channel 6 TV company, which was ultimately mopped up by TV3 after it suffered a financial meltdown. O'Callaghan was also an investor in vast private equity firm KKR's $15bn buyout of car rental group Hertz. He also put money into troubled low-cost private jet firm Jetbird.

O'Callaghan was linked with the €412m Irish Glass Bottle site deal, but this now appears to be wide of the mark. The Sunday Independent can also reveal that O'Callaghan was part of the Carraig Beag consortium which was involved in the €780m purchase of a property portfolio in Knightsbridge in 2006. Bernard McNamara, one of the key movers in the Glass Bottle deal, has also emerged as an investor in the Knightsbridge deal.

O'Callaghan had been wowed by the abilities of financier Niall McFadden during the Riverdeep buyout in 2002 and he would later invest with McFadden in the €255m take-private of department store Arnotts in 2003.

However, O'Callaghan isn't a lunatic. While he was gambling the ranch on growing Riverdeep through a series of billion dollar acquisitions, he was also making sure that all his family wealth would not be put at risk.

Three months after Riverdeep's €3bn purchase of Houghton Mifflin, he signed a document relinquishing his share of his Blackrock home to his wife Gerri. This was part of an estate management plan devised by KPMG, according to a spokesman. Within four months he had splashed out $4bn to buy Reed Elsevier's Harcourt division. It was a moment of caution in a high-risk career.

With hedge funds now in control of his business, O'Callaghan will have to switch to a decaf strategy or kick the habit completely.

Sunday Independent

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