Debt-laden Vivendi Universal announced plans Aug. 14 to sell off $9.8 billion in assets, including educational publisher Houghton Mifflin. The announcement carries significant weight for the company’s K-12 school customers, which include users of educational software from Sunburst Technology and Knowledge Adventure, now a division of Sunburst.
The sell-off signals the first step to break up the French media and entertainment conglomerate constructed in a two-year buying spree by former chairman Jean-Marie Messier.
Messier was ousted in July, leaving Vivendi struggling under $18.6 billion in debts. Messier’s replacement, Jean-Rene Fourtou, has since been seeking to reduce the company’s borrowings.
Analysts say it’s too soon yet to tell whether the sale of Houghton Mifflin, which Vivendi acquired for $1.7 billion in 2001, will have a direct impact on the throngs of products and services it sells to schools throughout the world. Besides textbooks, assessments, and supplemental materials, these products include software titles such as Type to Learn, Hyperstudio, and the JumpStart series of school software.
In the near term, however, the sale could be both good and bad for Houghton. The company no longer will carry the stigma of its financially troubled parent, but it will have to stay focused through a series of potentially hazardous leadership changes, said Adam Newman, director of research for financial analysis firm Eduventures Inc.
“Despite the turmoil surrounding Vivendi, Houghton continues to perform well,” Newman said. The sale should help the publisher put some distance between itself and the slimming conglomerate.
But that’s not to say there won’t be problems, he said. According to Newman, fear and uncertainty are not uncommon when companies undergo critical shakeups in leadership.
“It’s a real people issue,” he said. “The company does not want to experience a flight of talent. The real challenge is whether the new leadership can provide the energy that will be needed to really rally the folks who are there.”
In light of Houghton’s continued strong performance in the education market, Newman said he doesn’t expect Vivendi will have trouble securing a buyer.
But “the transaction is going to be driven by Vivendi’s needs,” Newman said. The company is thirsty for quick cash to pay down its ballooning, multibillion-dollar debt, and it is likely to accept whichever bid promises the most money up front, he said.
Ideally, Vivendi would stand to make a better profit by breaking Houghton up and selling it in pieces. But Newman thinks an all-or-nothing deal is more likely, given Vivendi’s immediate need for cash. “At the end of the day, it’s going to be Vivendi’s cash constraints that are going to drive this deal,” he said.
Under these circumstances, there are three wholesale buyout firms Newman believes possess both the interest and the financial wherewithal to consider the purchase seriously.
Those companies are Kohlberg Kravis Roberts & Co., an international firm with a history of more than 100 transactions and $100 billion in total financing; Boston-based Thomas H. Lee Co.; and Forstmann Little & Co., which in the past has poured more than $10 billion into 30 companies across the world.
If a buyout firm does succeed in purchasing Houghton outright, Newman said it’s anybody’s guess what could happen next.
Any number of firms would be interested in getting their hands on certain pieces of Houghton’s business. Several major education players, including Scholastic Inc., Knowledge Universe Inc., and the Washington Post Co.with its test-preparation firm Kaplan Inc.have expressed an interest in expanding, Newman said. Acquiring some piece or pieces of Houghton’s business would be a step in that direction.
Though there are several possibilities, Newman stressed nothing is certain until a deal is announced.
As for Houghton’s school customers, Newman said it’s unclear whether a breakup of the company into divisions would have any adverse impact on the services it offers to educators. But drastic changes, he said, are unlikely.
“Any time you have an acquisition, there is the potential for minimal as well as drastic change,” he said. But with a company like Houghton, which has done well, there often is little need to disrupt its relationships with customers by shaking things up and eliminating services. Vivendi’s plan to dispose of at least $9.8 billion in assets$4.9 billion of them in the next nine monthswas approved by Vivendi directors at a board meeting on Aug. 13, the company said in a statement.
Vivendi said its board also would meet Sept. 25 to “review in detail the company’s strategy to optimize all of its assets.” After his appointment as chairman on July 3, Fourtou said his priority was tackling Vivendi’s cash crisis.
Vivendi’s statement said the firm has made progress with a plan to set up a $2.94 billion credit line with its banks. Vivendi already had obtained $980 million in unsecured credit last month.
In another move away from Messier’s era, Fourtou also announced the appointment of Jean-Bernard Levy as chief operating officer, the statement said.
Levy replaces Eric Licoys, who was close to Messier. Licoys agreed to continue with Vivendi as an adviser to Fourtou, the firm’s statement said. Fourtou also presented the board with “new management principles” for Vivendi, the statement said without giving details.
Messier tried through costly acquisitions to transform Vivendi, once a humble water company, into a world-leading media giant to rival the likes of AOL Time Warner Inc. His ambitious plans and glitzy lifestyle initially saw Messier hailed as a French business marvel. But his reputation took a dive as Vivendi racked up huge debts and reported massive losses.
According to Peter Grunwald, an analyst with Grunwald Associates, Vivendi’s decision to sell Houghton Mifflin reflects a pattern of carelessness evolving in large companies, many of which look to expand too quickly and too often.
“The education business, especially, is different from a lot of other sectors,” he said. “It’s important for large companies involved in acquisitions of education and technology businesses to understand why they are doing it and put some thought into how those strategies are going to fit into the overall structure.”
Houghton Mifflin Co.
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