Riverdeep executive chairman Barry O'Callaghan and top managers stand to receive a "promoter and management incentive" shareholding worth at least $132 million (€100 million) from the education software group's $4.95 billion reverse takeover of US publisher Houghton Mifflin.
Mr O'Callaghan will take the lion's share of this stake following completion of the mammoth deal, one of the biggest by an Irish company. The transaction will be executed by a new entity called HM Riverdeep, which has bought out Houghton Mifflin for $3.4 billion and Riverdeep for $1.2 billion. Refinancing costs and fees bring the value of the deal to $4.95 billion.
The transaction is being financed with $660 million in new equity, $350 million in preferred equity and $3.14 billion in debt from Credit Suisse and Citigroup. Shareholders in Riverdeep will reinvest $600 million and the two companies combined cash balances of €160 million are also being utilised.
HM Riverdeep is likely to be floated or recapitalised within two or three years, a process that will offer the new equity investors an opportunity to take money out of the business.
Mr O'Callaghan and the company management will own more than 50 per cent of HM Riverdeep. He is to roll over his stake in Riverdeep and invest some $200 million in new money raised in recent weeks in return for 25 per cent.
He will also be the main beneficiary of the additional stake of about 20 per cent transferred free of charge under the "promoter and management incentive".
This incentive arrangement is designed, in place of a share option scheme, to lock in Mr O'Callaghan and his management team.
"For the avoidance of doubt, there will not be a share option scheme for the promoter and senior management team," prospective investors were told.
New investors, mostly clients of Davy Stockbrokers, and US and European institutional investors, will own more than 20 per cent of HM Riverdeep.
Other Riverdeep shareholders will hold around 15 per cent of the enlarged group. The balance of about 8 per cent will be in the form of payment in kind equity held by institutional investors.
The deal is a direct result of Mr O'Callaghan's friendship with Tony Lucki, his counterpart at Houghton Mifflin and a former non-executive director at Riverdeep. Mr Lucki will be president of HM Riverdeep and Mr O'Callaghan will be executive chairman.
Mr O'Callaghan is understood to have approached Mr Lucki last summer when he learned that Houghton Mifflin's private equity owners, Thomas Lee Partners, Bain Capital and Blackstone, were planning to float the 174- year-old publisher.
The $1.2 billion valuation on Riverdeep is twice its value in March 2004 when the company was last refinanced. Mr O'Callaghan took the group private for $400 million in controversial circumstances in 2003.
The offer price of $6 per Riverdeep share is at a significant premium of the management buyout price of $1.51 in 2003.
HM Riverdeep aims to combine Houghton Mifflin's strong position in the under-12 education market in the US with Riverdeep's portfolio of educational software products.
The new group aims to grow revenue by cross-selling through Houghton Mifflin's sales team, which is much larger than Riverdeep's. It hopes to achieve cost-saving synergies and make financial savings through the restructuring of the new group's intellectual property assets to an Irish tax base.
