Monday, July 09, 2007

The Debt-Laden Minnow

The trip to the Cayman Islands is a done deal, with today's board meeting a formality to rubber-stamp the decision. The minnow will relocate to a country that does not tax business profits, even though HM Riverdeep says it will maintain its tax base in Ireland. The bloated little fish is going south so that the shareholders can recoup a bit of cash.

A dividend recapitalisation is used to fund an acquisition, or it can be used to provide a special dividend for investors. Under Irish law, HM Riverdeep would only be allowed to pay out a dividend if there was a real profit, an income after expenses positive bottom line source of funding. Under Caymans law, the dividend can be made through debt financing, but HM Riverdeep is already so deep in the hole that it seems far-fetched to imagine Credite Suisse or Citigroup coming up with even more money. Who will be paying for this dividend recap?

As Barry O'Callaghan owns 25% of HM Riverdeep, he stands to get the biggest dividend, and the clients of Davy Investments will get their cut, although it may not be quite what they were expecting, having been told that they would double their money in a couple of years.

Debt piled on debt, rather than the promised synergies and cost cuts? The sharp pencils at Moody's may be tempted to lower HM Riverdeep's value even further, unless the company can deliver as promised. Or is the minnow positioning itself as a mighty whale, a prime target for someone else to capture, before its value sinks to the bottom?

Employees of Houghton Mifflin may not much care, as long as someone keeps signing their paychecks every week and the checks keep clearing the bank.

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