There's no way around the $7.1 billion that EMPG owes. Barry O'Callaghan's former minnow of a firm, Riverdeep, grew bloated on debt when he swallowed up Houghton Mifflin and Harcourt's Education branch.
There is a way to lift a little of that heavy burden from the minnow's shoulders and spread the weight around. It requires Mr. O'Callaghan to also yield a significant portion of his power in the board room.
Creditors like BlackRock and Guggenheim Partners are willing to take on $1 billion of the over-all debt, but they get 45% of EMPG in return. Mr. O'Callaghan becomes a smaller fish in the sea that he created.
No longer can he vote no on some issue and have his way. That's little enough to give up, however, when the other option is bankruptcy. With the debt-for-equity swap, the annual cost to service the enormous debt will be decreased, and anything that makes it easier to swim out from under water is all to the good.
Mr. O'Callaghan believes that HMH and EMPG are at the top in the educational publishing materials game, and the creditors may or may not think the same. What they are banking on is an upturn down the road, where the investment will pay off at a better rate later than what could be had in a bankruptcy proceeding now.
"The difficult parts of the equity aren't being led by some...deluded entrepreneur..." Mr. O'Callaghan stated when he announced the deal.
He must have been referring to his loss of voting control.
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