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Riverdeep, a small Irish educational software company, is in talks about an ambitious $3.5bn reverse takeover of Houghton Mifflin, one of the best known educational publishers in the US.

The combination of Riverdeep, a privately controlled company with an estimated value of $1bn-$1.5bn, with the fourth-largest educational publisher in the US would highlight the pace at which software tools are transforming the textbook market.

Thomas H. Lee, Bain Capital and Blackstone Group bought Houghton Mifflin from Vivendi in November 2002 for €1.7bn (then equivalent to about $1.7bn) but the reverse takeover talks are understood to value the company at twice this dollar figure.

Credit Suisse, which has backed Riverdeep before, is understood to be involved in financing the transaction but could not be reached for comment.

Houghton Mifflin’s private equity backers, who had been widely expected to cash in their gains from the investment, may roll over some or all of their investments into the new merged company.

The proposed deal would create a near-$5bn educational publishing rival to Pearson, the owner of the Financial Times, McGraw Hill, Reed Elsevier’s Harcourt division and Thomson, the Canadian group. It would also mark a remarkable coup for Barry O’Callaghan, the 37-year-old Irish entrepreneur who controls about 65 per cent of Riverdeep, alongside other executives of the company and private clients of Davy stockbrokers.

Mr O’Callaghan, a former lawyer and investment banker, is expected to remain as chairman and chief executive of the combined company. Tony Lucki, Houghton Mifflin’s chief executive and a former non-executive director of Riverdeep, is also expected to remain, with responsibility for the book division.

Riverdeep sells software tools such as its flagship Destination Success product to 45,000 schools in 20 countries.

In 2004, the last year for which published accounts are available, Riverdeep reported $64m in earnings before depreciation, amortisation, reorganisation charges and losses on disposals.

Mr O’Callaghan floated the company in March 2001 and then took it private two years later with backing from Alchemy, which has since sold its stake.

His talks with Houghton Mifflin come as some educational publishers are wavering over the investment needed in new digital tools.

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