Houghton Parent CEO Blames California for Making Him Blow Billions

More From Barry "Don't Blame Me" O'Callaghan

by Michael Cader, Publishers Lunch

Education Media and Publishing Group ceo Barry O'Callaghan continues to provide an astonishing mix of remarks and revisionist history to the Irish media. It "bemuses" him that he's "being positioned as the bad guy" in the evaporation of billions of dollars of equity. It's not his fault, "It's just bad luck for me and my fellow shareholders. It's nothing different from the people who bought houses [in the boom]." Plus, "people are perfectly entitled to take a swing at me because I've lost them money and I'm disappointed, too. But don't blame me for what I don't control. This downturn wrote off the equity of lots of leveraged businesses."

If you want to assign blame, O'Callaghan reasons, then blame California. "We didn't expect the market to decline because it wasn't supposed to. California was supposed to buy books last year but they couldn't afford them so they didn't." He adds, "Our biggest customer is the state of California and the state . . . has a massive, massive state deficit.... In education, to protect jobs, they've particularly cut discretionary spend in other areas, particularly textbooks."

He indicates to the Irish Times that EBITDA was "projected to hit $1.07 billion" in 2009, "but collapsed to around $500 million." But the company's debt service was $700 million a year.
Irish Times

In many articles, O'Callaghan has emphasized that he lost as much paper wealth as anyone in the company's equity collapse. But in a separate Irish Times piece, intended to ensure local creditors that he isn't going to default on them too, O'Callaghan implies that he will remain well off and didn't manage his personal finances with the same reckless leverage as his corporate finances: "The fact of the matter is that I'm good for my money because I only speculated what I could afford to lose. I expect to honour every single obligation I have, not just with Anglo Irish Bank, but with lots of domestic and international banks. I'm not broke, I'm perfectly solvent. Of my various investments, some of them are up and some of them are down."

In one other don't-blame-me remark, O'Callaghan offers this: "In retrospect, did we overpay for these assets? Of course we did. But then again, that's not a story you can blame me for. The whole world overpaid for assets back in 2006 and 2007 and nobody anticipated what would happen to the world."

But was there ever a speculative bubble in education publishing companies (except for O'Callaghan's buying)? And were there really no warning signs from the very beginning? Let's review our history:

In 2000, another soon-to-implode conglomerate Vivendi bought Houghton Mifflin for $2.2 billion. Two years later, in 2002, they sold it for $1.66 billion to two private equity companies. Four years later, in 2006, when the company known as Riverdeep came to buy, they paid $3.36 billion.

In December 2006 the Telegraph had this to say after Riverdeep closed their acquisition of Houghton Mifflin: "The entire tale has so many characteristics of our times: two companies with years of reported net losses -- but no one seems to care; endless refinancings at higher values, while private equity firms book huge cash profits in record time; a very young Irish financier turning into an incredibly bullish industrialist; lucrative fees ($91m on this deal alone) at every turn for the advisers; and a financing structure built on mountains of debt, all at stratospheric multiples, with no hope of ever paying off the principal through operations."

In January 2007, auditors Ernst & Young resigned the account "as a result of incorrect representations made to us by the company's parent in respect of a material contract" and ratings agency Moody's said they were considering cutting their rating on the company.

When HM Riverdeep bought Harcourt's US businesses in mid-July 2007, they put in just $235 million in equity, and borrowed the rest of the $3.7 billion in cash given to Reed Elsevier (which also got $300 million in stock to close the deal). It was right then--not September 2008--that "global credit markets went into a tail spin" (Independent). At the time, the FT reported that "it is understood that nervous credit markets prompted some banks to walk away from providing debt for the Harcourt deal and were the reason Reed took an equity stake to get the deal done."

Two days later, Moody's expressed additional "concerns that the incremental debt and costs to achieve synergies will delay the previous expected decline in leverage" at the education conglomerate.

At the end of 2007, the banks that had refinanced the entire empire, including the Harcourt purchase, had to postpone a planned syndication of their over $7 billion in loans.