John Paulson Helps With Restructuring of Houghton Mifflin Harcourt

Last month DailyFinance asked if hedge-fund manager John Paulson (pictured) could save the troubled publisher Houghton Mifflin Harcourt from the billions of dollars of debt acrrued by its parent company, Education Media and Publishing Group. Now it looks as if the restructuring plan, which would inject $650 million of fresh capital and wipe out at least $475 million in the stakes of existing private-equity holders, will be completed on or around March 9.According to an internal memo obtained by DailyFinance, EMPG CEO Barry O'Callaghan confirms earlier reports, saying that the new cash infusion "will be combined with our current lenders' conversion of approximately 60% of their secured debt to equity in our Company. Coupled with previous changes in the capital structure, we will reduce the amount we pay for annual interest by more than 75%, giving us greater liquidity for growth."

O'Callaghan adds that this "terrific news" will "place Houghton Mifflin Harcourt on the strongest financial footing in the Company's history, giving us the financial flexibility and freedom to continue to build the world's leading education company." As part of its new business plan, HMH also announced the creation of a $100 million innovation fund for future-thinking projects.

Here's the full memo:
From: Office of the CEO
Date: Mon, 22 Feb 2010
Subject: Important Update on Financial Restructuring

Today, we are pleased to inform you that leading institutional investors have committed to invest $650 million in our Company, and that we have reached an historic agreement on a recapitalization that strengthens HMH's balance sheet, significantly reduces our debt, and provides for substantial new equity investment and greater liquidity for growth. We expect the transaction will be completed in the next few weeks.

This is terrific news for our Company, and all of our stakeholders, including our customers, business partners and employees. It will place Houghton Mifflin Harcourt on the strongest financial footing in the Company's history, giving us the financial flexibility and freedom to continue to build the world's leading education company.

The $650-million equity investment will be combined with our current lenders' conversion of approximately 60% of their secured debt to equity in our Company. Coupled with previous changes in the capital structure, we will reduce the amount we pay for annual interest by more than 75%, giving us greater liquidity for growth.

With this important development, we will have successfully completed our comprehensive balance sheet deleveraging. We have gained overwhelming support from our investor base, which sees unparalleled value in our underlying business and our future prospects. As a result of their confidence, financial backing, and commitment to our future, HMH is extremely well-positioned to maintain and grow our status as the preeminent pre-K–12 publisher, which will lead the transformation of educational solutions. We will be able to realize our full competitive and growth potential and build the value of our Company for all of our stakeholders, including our loyal customers and dedicated employees.

Our investors were highly complimentary in their remarks about our Company and our promising future. John Paulson, President of Paulson & Co., said, "With the new deleveraged capital structure, the Company is even better equipped to continue as the leader in delivering best-in-class educational products and solutions to teachers and students across the globe."

Todd Boehly, Managing Partner in the Office of the CEO at Guggenheim Partners and a significant stakeholder in HMH said, our Company is "set to capitalize on the opportunity to educate children in innovative and thoughtful ways, with its significant tools and education content in partnership with educators and schools across the country and around the world."

As a part of our strategic business plan, we also announced the creation of a $100-million innovation fund to take advantage of HMH's deep technological strength and develop the next generation of educational products and solutions. This fund will invest in the future of education. Today, schools, teachers, parents, entrepreneurs, and even students are thinking about and developing the educational tools, services, and businesses of tomorrow. This fund is a first for our industry, providing the capital to identify and incubate the next generation of innovation in education.

We believe that HMH is ideally positioned to provide our customers and business partners with high-quality services and solutions and superior customer care for many years to come. What this means for you is that HMH will be a more dynamic, growth-oriented, and professionally rewarding place to work. We are leaders in educational publishing and will be at the forefront of innovative digital education solutions and investments in new product development.

We regret that many of you have had to respond to the rumors and speculation in the marketplace and media as we were completing the critical elements of this plan. We appreciate your patience, dedication, and continued support-without which we would not have been able to achieve this transformation. Looking ahead, we also recognize the remaining economic challenges for many states and school districts, as reflected in their purchasing decisions. We all need to stay focused on doing our jobs, staying close to our customers and business partners, and building the value of our enterprise. Despite a tough competitive and economic environment, we can all take pride in what we have accomplished together and dispel the rumors and misperceptions in the marketplace with the facts.

Thank you for your outstanding work. We can look forward to reaping the benefits of our efforts as we build a great future for HMH and everyone associated with it.
Barry O'Callaghan
Chief Executive Officer
Michael Muldowney
Chief Financial Officer

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