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O'Callaghan's HM Riverdeep stake to hit €1.5bn after deal

HM riverdeep boss Barry O'Callaghan's recent $4bn (€2.7bn) deal to add Reed Elsevier's Harcourt US education business to his publishing empire could result in the value of his personal stake soaring to $2.2bn (€1.5bn).

It would see the 38-year old former corporate financier sail comfortably into the exclusive club of Ireland's 10 richest people -- and the only billionaire in the country below 40.

This is based on estimates by Davy, broker to HM Riverdeep, which was recently renamed Education Media & Publishing Group (EMPG), in a note to its clients of how the Harcourt deal has the scope to create $300m of cost synergies.

The synergies would come by joining Harcourt with Houghton Mifflin (HM), the US education publisher Mr O'Callaghan merged with Riverdeep at the end of 2006. The combination should slash up to 30pc off the costs of production, sales and administration, said Davy.

This gives rise to the potential for $3.5bn of extra value being created, according to Davy, and an enterprise value for the group of €13.1bn.

Stripping out EMPG's existing $7.3bn debt pile points to an equity valuation of $5.8bn for the group. The group's debt is likely to decrease when it receives the $750m in cash from the agreed sale last November of its US college publishing business to rival Cengage.

Some $535m of additional equity is being injected into the group to help fund the Harcourt deal. This includes Reed Elsevier taking a $300m, or an 11.8pc stake, as part payment, and Davy raising an additional $235m from existing investors over the coming months. Mr O'Callaghan has personally committed $40m as part of this fundraising.

The new equity is being priced at $10 a share -- the same level as when Riverdeep raised almost $200m in 2006 to fund the $4.95bn Houghton Mifflin merger.

Davy said it believes the "equity investors could potentially double their investment over the next two years".

Shares in the group are currently traded in a grey market operated by Davy. While the broker said it is too early to discuss how investors will realise gains, potential exit strategies over the next two to five years include a stock market flotation in America or a trade sale "to a large international publishing company such as Newscorp or Viacom".

It said a third option of refinancing the group is the least likely route, given the current state of the debt markets and EMPG's relatively high existing debt.

Riverdeep was founded by Pat McDonagh in 1995 as an e-learning company. Four years later he brought in Mr O'Callaghan, then at Credit Suisse First Boston, as the group's chief executive as it was prepared for flotation.

The group listed on the Nasdaq in March 2000, just days before the market reached its all-time peak -- giving Riverdeep an initial valuation of $2bn. Its subsequent slump ultimately led to Mr O'Callaghan leading a €349m management buyout deal to take the group private in 2002.

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