Sunday, February 01, 2009

Riverdeep Mountain High

When times are good and credit is cheap some build significant empires but when winter comes and the sub prime ice storms come then that debt may become very visible and be hard to finance. Houghton Mifflin Harcourt has $6.7 million of debt, which ten times its gross earnings and according to the Boston Globe is putting the iconic 180 year old publisher on shaking ground.

So what happened to a publishers whose author list includes the likes of; Roger Tory Peterson, JRR Tolkien, Philip Roth, Arthur M. Schlesinger Jnr and Rachel Carson? In 1978, Western Pacific Industries acquired a large stake in Houghton Mifflin which was defeated not by money but a group of famous Houghton authors, led by Archibald MacLeish, John Kenneth Galbraith, and Arthur M. Schlesinger Jr. who threatened to move from the company if the sale went through.

In 2001, Vivendi International bought the company for $2.2 billion and they became part of an empire which included Universal Studios, theme parks, TV stations, and telecom companies. A year later debt brought down the empire and in 2003 Houghton Mifflin was sold at a $500 million loss to a Boston-based equity partnership. Then in 2006 Dublin based Riverdeep Group bought the company for $3.4 billion a surprising move given the company was only a $392 million educational software company.

Riverdeep had high ambitions east credit and a year later had bought Harcourt from Reed Elservier for $4 billion. Reiverdeep had grown from a $8 million sales educational publisher in 1999 to Houghton Miffen Harcourct Riverdeep in just seven years with a significant debt.

Combining two similar publishers is not as simple they bought the same kind of list. Educational publishing has in principle one curriculum so having two reading programs, two math programs, two of everything is not the answer – this is not Noah’s Ark. When you add a recession you add a big problem to any company with debt but for a company that hasn’t consolidated and shed the excess you have a problem.

So the rating has been slashed and its core educational business is cost cutting and threatening even its existing revenue levels. So some would suggest the vultures are in flight, a fire sale beckons and it’s hard to see how they can service the debt in this climate.

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