Saturday 17 February 2018

Quiet exit for the one-time, high-flying publishing magnate

Barry O'Callaghan leaves Houghton Mifflin Harcourt after an effective takeover by bondholders in a huge blow for the consummate deal maker

Emmet Oliver

Barry O'Callaghan has substantial Irish interests, including the Cliff House Hotel, Waterford, (above left) and the Cliff House in Dublin (below left).

The departure of Barry O'Callaghan from the education publishing empire he built up over 12 years had a sense of permanence about it yesterday. While Mr O'Callaghan is retained as an adviser to the firm for a year, there was no mention of the Corkman on the company's website only hours after it was announced he was departing.

In fact, the privately owned company didn't even announce his departure to the press, it simply emerged following a leak of the information to the 'Wall Street Journal'.

Mr O'Callaghan himself was not commenting on his future plans yesterday or how much money he lost as a result of the radical restructuring of his company Houghton Mifflin Harcourt last year.

The phrase "his company'', of course, is a misnomer, but the Trinity College-educated Irishman has been the frontman for the primarily US publisher for several years now.

While corporate advancements are always described as "meteoric", Mr O'Callaghan's progress up the corporate ladder has been truly astonishing. He was appointed chief executive of Riverdeep, the original education publisher he was associated with, in his early 30s by Irish entrepreneur Pat McDonagh.

Several years as an investment banker in London and the US was sufficient for Mr O'Callaghan to land the role.

He had no previous publishing experience but Mr O'Callaghan has never traded on industry experience, instead he has traded on being a consummate deal maker, using the skills of an investment banker.

In fact, in his early career in education publishing Mr O'Callaghan couldn't stop notching up successes. He brought Riverdeep to the NASDAQ in 2000 and the market responded by placing a value of $2bn on the company. In the years following the flotation, Mr O'Callaghan rode the wave of cheap money available in the US and Europe for M&A deals.

An extraordinary seven bolt-on acquisitions were successfully completed by Mr O'Callaghan in the early part of the past decade and there was no shortage of finance to oil the wheels of Mr O'Callaghan's deal-making machine.

Acquisitions were one thing, leveraged buyouts (LBOs) were another. Hugely in vogue in the years after the crash and before the US sub-prime crisis, Mr O'Callaghan, with his investment banking background, undertook a major LBO in 2002 and bought the assets of Riverdeep for almost $400m using a company called Hertal Acquisitions.

The deal was put together by some big players, including private equity firm Alchemy Partners and Mr McDonagh once again was involved.

Many would argue this was when the over-leverage of the O'Callaghan companies set in; but at that point Mr O'Callaghan was not doing anything with his balance sheet that wasn't being done elsewhere.

The next substantial transaction Mr O'Callaghan pulled off was in 2006, when substantial amounts of debt were added to the mix. At that point, Houghton Mifflin was bought from several private equity players for a purchase price of $3.4bn and essentially merged with Riverdeep.

The deal was a huge triumph for Mr O'Callaghan in business and personal terms. "Riverdeep represents an excellent fit with Houghton Mifflin," he told investors. At that point Mr O'Callaghan and his management team owned an extraordinary 50pc of the company, with the new investors who took part in the deal owning 15pc.

This was the high water mark for Houghton Mifflin in many ways. Leverage went into overdrive in 2007 when the company made another huge acquisition to buy Harcourt Education Harcourt Trade for $4bn.

Within two years, the credit markets were freezing up and ratings agencies were taking a dim view of how much debt the company was carrying following these deals. This irked Mr O'Callaghan and his company, who found themselves in dispute with some of the ratings agencies.

In early 2009, for instance, Standard & Poor's was slashing the company's rating to just two notches above bankruptcy as debts spiralled to more than €7.6bn. It expressed concern about the ability of the company (then owned through a holding company called Education Media & Publishing Group) to remain inside its bank covenants.

The only way the company could stay in the safety zone was for substantial cost cuts and price increases to be put through, but by then the US was in full meltdown and the education publishing world was in no mood to bear increases from any suppliers.

There was also talk of Mr O'Callaghan selling non-core divisions to drive down the debts.

It was a unusual turn of events for Mr O'Callaghan. Where once he was lauded as a deal-maker supreme, now he was pilloried for building up unsustainable debt levels and imperilling the equity in the company. Both of these views he strongly disagreed with.

Either way he found himself slipping down the annual lists of Ireland's most wealthiest and the biggest dent in his net worth arrived last February, when previously compliant bondholders moved in, converting 60pc of their debts into shares in the company.

This wiped out the old equity holders in the company, including Mr O'Callaghan, who had owned a stake (along with management), measured in the billions. But following the capitalisation deal, Mr O'Callaghan's net worth plunged, with the Corkman admitting himself he lost more money "than anyone''.

How Mr O'Callaghan funded his original stake has never been revealed and which Irish bank was involved is the subject of some conjecture.

Either way, the dilution of Mr O'Callaghan's stake and the effective takeover of his company by bondholders was a massive blow. It also reflected poorly on the structure of the previous deals that the company found itself in this position.

The key player in the takeover via the back door was John Paulson, of Paulson & Co, one of the world's most powerful hedge funds. This company shorted the US sub-prime market and made one of the biggest killings in financial history.

The building up of value in Houghton Mifflin may take a lot longer, although top-line revenues are growing at 5pc a year, explained Mr O'Callaghan's temporary successor Michael Muldowney yesterday.

The company has $500m (€359m) in cash on its balance sheet, and employs 240 staff in Ireland. Debt is now down below $3bn.

Ultimately, none of this will be a long-term worry for Mr O'Callaghan who is to pursue other projects. He has extensive Irish interests, including the Cliff House Hotel in Waterford and Bentleys restaurant in St Stephen's Green, Dublin.

The Corkman has probably learned more from his recent setbacks than he ever did during the carefree days of the post boom. But it looks like being an expensive way to acquire new knowledge.

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