Running Dry

Billions have been written off recently, as high risk loans go into default and shaky mortgages are foreclosed. The money stream is running low, a time of fiscal drought that could be a problem for the whale-swallowing minnow that has become HMRiverdeep-Educational Media-Harcourt-and what all.

Should HMRiverdeep get approval from Washington for their acquisition of Harcourt's educational media arm, will the deal still get done? Where's the money to come from?

Paul Finnegan of Madison Dearborn Partners believes that leveraged financing is still alive, although the investment bankers will ask for a higher premium to cover their exposed arses. He adds that cash flows have to be demonstrably strong as well, since the bank wouldn't like to take on a risky venture with the mortgage fall-out still resounding. It would then be up to Barry O'Callaghan to convince the bankers that he's their man and his merged entity is a lean, mean publishing machine.

If he can show good performances at HMRiverdeep, he has a better chance of attracting investors to buy his commercial paper. So what of Mr. O'Callaghan's original projections? As suggested by Patricia Lane of Foley & Lardner, such a deal could come at a higher price than originally calculated. Before the fall, investors were snapping up bonds that arose from leveraged buyouts, but those same investors were burned and are not quite so ready to jump back into the fire. They'll want more in return for taking another chance. There's also the risk that they won't want to buy at all, as happened to JPMorgan's attempt to sell bonds for Clayton Dubilier & Rice's acquisition of ServiceMaster. JPMorgan had to eat their own paper, and an investment bank doesn't much care for a $1.15 billion feast.

Selling bonds to finance HMRiverdeep's buyout of Harcourt Education could take a lot longer, given the state of the market and the hesitancy of the investment banks. However, there is money out there, estimated to be in the range of $263 billion, and a smaller deal has a better chance of going forward than a mighty whale of a leveraged buyout. $7 billion is such a small portion of the bigger pool, a drop in the bucket you might say.