Can John Paulson Save Houghton Mifflin Harcourt from Doom?

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Ever since 2006, when Barry O'Callaghan merged Houghton Mifflin with Harcourt, HMH has been nothing but a river of deep, mounting debt for the Irish education-publishing magnate and HMH's parent company, Education Media & Publishing Group. Even two debt restructurings as recently as August left the company holding more than $6 billion in debt, and in danger of defaulting on a slew of creditors -- some with plenty of troubles of their own. But O'Callaghan might have a savior in hedge-fund manager John Paulson (pictured).According to the Irish Times, O'Callaghan plans "a major financial restructuring" that could see debt levels reduced by about 70%, to about $3 billion, and injections of fresh capital of about $600 million. The bad news: The restructuring will likely wipe out at least $475 million in the stakes of existing private-equity holders, who had loaned the money by the Anglo Irish bank, now owned by Irish taxpayers as a result of the global fiscal crisis.

Out of Control

O'Callaghan was quick to assert his lack of fault and his own substiantial losses. "Nobody has lost more on paper than I have," he told the Financial Times. "Obviously I'm disappointed for my fellow shareholders, but I can't be blamed for things I can't control, and unfortunately state budgets are things I can't control. I looked very smart through September of 2008." But his desire to acquire and to overleverage while the economy was spiraling downwards made overall debts balloon that much more, leaving him vulnerable to a massive company collapse.

That's where Paulson comes in. The FT reports that Paulson has bought up the bulk of EMPG's debt and will emerge as its main shareholder. The plan appears to be risky but elegant: With existing stockholders and the balance sheet tidied up, EMPG can then start selling new stock to new investors, who will contribute the $600 million necessary to get things working smoothly. Paulson told HMH employees, "With the dramatic reduction in debt and injection of new capital, I believe Houghton Mifflin Harcourt is well positioned."

Indeed, HMH may emerge from this debt-ridden mess with its heart still beating, ready to conduct business as usual. (In keeping with this motif, O'Callaghan will stay on as the head of the restructured company.) But O'Callaghan and CFO Michael Muldowney's plea to company employees not to "allow yourselves to become distracted by speculation or rumors in the marketplace" doesn't look to be heeded anytime soon -- especially if the restructuring plan fails to stem the bleeding debt after all.
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