Dubai's sudden default last week of $60 billion worth of debt played havoc with the markets, spurred talk of bailouts, and put added stress on an economy just barely showing signs of a turnaround. But it was also another piece of awful news for Education Media & Publishing Group, the troubled, debt-ridden parent company of Houghton Mifflin Harcourt, the education and trade publisher.
EMPG, a private company based in Dublin and run by Barry O'Callaghan, partnered in 2008 with Istithmar World Capital, a subsidiary of investment company DubaiWorld. The resulting $125 million joint venture, EMPG International, was intended "to bring the education publishing group's products to developing markets."
Isitithmar ended up a major shareholder in EMPG last July, after a complex restructuring deal, taking a 45% stake in the company in tandem with several other holding companies. It seemed like a win-win, giving EMPG a crucial cash infusion to help alleviate its $7.5 billion debt from acquiring and merging Houghton Mifflin and Harcourt. Istithmar's share in EMPG gave Dubai's royal family a foothold in the multibillion-dollar education publishing industry with one of the largest textbook publishers for the K-12 market.
But the sweetheart deal that EMPG cooked up to reduce its debt may accomplish the exact opposite. Istithmar may be forced to sell assets to free up cash, the Irish Independent reports -- but taking on even a small portion of the education company's massive debt seems a risky proposition, even at fire-sale prices. EMPG International says it's "fully funded and unaffected" by Dubai's meltdown, but that seems like a hollow assertion in light of Istithmar's owning a significant chunk of its stock. (Neither EMPG nor Istithmar World Capital were available for comment.)
EMPG -- and by extension, Houghton Mifflin Harcourt -- is hardly the only company facing Dubai aftershocks. Barneys New York, Cirque du Soleil, and hedge fund GLG Partners are just some of Istithmar World Capital's holdings. But it comes as a bitter pill to those employed by the education company, who this holiday season may face even more bad tidings than they'd been expecting.
UPDATE: Shortly after the piece went to press, HMH spokesperson Josef Blumenfeld said there is "no pressure" for Istithmar to sell its stake in EMPG, "but even if it did, we do not expect there to be any meaningful impact on HMH or EMPG."
Introduction to Value Investing
Are you the next Warren Buffett?View Course »