Friday 19 October 2018

EMPG chiefs to end up with 10pc of publisher

Proposed deal already has support from over 80pc of firm's existing shareholders

Joe Brennan

Management at Barry O'Callaghan's Education Media and Publishing Group (EMPG) could end up with 10pc of the group under a new incentive plan for the company's top brass.

The proposed incentive scheme is outlined in a circular sent out to shareholders before an extraordinary general meeting next month on a massive restructuring of the group, which would see creditors owed $1bn take a 45pc stake in the business.

Mr O'Callaghan said that alternatives examined by the group, with an $8bn debt mountain, included further cost cutting, disposal of its trade business and finding balance-sheet restructuring.

The alternative of filing for bankruptcy protection or a court-implemented restructuring alternative to the new debt-for-equity swap deal "would likely remove the potential for (shareholders) to enjoy any economic recovery", he warned.

The transaction is already backed by over 80pc of existing shareholders, including Mr O'Callaghan himself who will see his 37.8pc stake diluted to 20.6pc.

Small Irish shareholders, who own about 10pc between them and can trade their shares on a grey market operated by Davy, will see their combined holding fall to 5.5pc.


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.

It has become the biggest educational publisher in the kindergarten-to-12th grade (K-12) market in the US.

Reed Elsevier's stake drops from 11.8pc to 6.5pc.

As reported by the Irish Independent at the end of July, the deal sees Istithmar World Capital, owned ultimately by the Dubai royal family, private equity firm Apollo Management, Merrill Lynch and hedge funds Cyrus Capital, Avenue Capital and Bluebay Asset Management participate in the debt-for-equity swap.

The creditors are converting $484m of senior equity loans and $572m of so-called payment-in-kind (PIK) notes, where expensive risk is rolled up over the lifetime of the loan.

They will convert their exposure into equity at $5.5 per share, almost half the $10 level at which the group raised equity to fund both the HM and Harcourt deals.

The circular confirmed that EMPG's earnings before interest, tax, depreciation and amortisation (EBITDA) rose 18pc last year to $750m, but warned that this year's performance is running behind original expectations.

"As the institutional school market depends largely on state and local funding, the current lack of certainty regarding state budgets and local tax receipts have impacted on EMPG customers' willingness to make new purchases and the outlook for 2009 remains uncertain as macro-economic conditions continue to deteriorate," it said.

EMPG had originally factored in the level of new curricula being unveiled -- and need for new textbooks, etc -- falling 11pc in the US this year. It is now forecasting a 35pc decline as individual states defer adopting new curricula.

Still, it has won 52pc of all new business from states that have been in the so-called 'adoptions' market in the first half of the year.

A broader EMPG debt restructuring sees senior -- or first lien -- debt holders, who are owed $4.3bn, lower the coupon, or interest rate, they are due. In return, they get a higher portion of their annual payment in cash, and a lower portion of interest roll-up.

Holders of the group's $1.8bn of second lien debt will roll up the coupons they are owed until 2014. For their part, they will see their annual coupon jump to 17.5pc from 9.5pc, currently.

All told, the measures should shave $100m off its estimated $400m-plus annual interest bill.

Meanwhile, the circular said that Clare-born financier Domhnall Slattery will step down from the board of directors to make way for appointees from the new stakeholders.

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