Houghton Mifflin to buy Harcourt

LONDON (Reuters) - Anglo-Dutch publisher Reed Elsevier agreed on Monday to sell its education arm Harcourt to rival Houghton Mifflin for $4 billion, creating a giant U.S. textbook firm in an industry undergoing a major ownership shift.

Reed Elsevier (REL.L) (ELSN.AS), like its publishing conglomerate peers, is getting out of education to focus on areas such as legal and science, which are growing faster and are more profitable because they have adapted to an electronic model more quickly than have school materials.

Boston-based Houghton will pay $3.7 billion in cash and $300 million in common stock of its privately owned Houghton Mifflin Riverdeep Group Plc parent company. Reed Elsevier will retain an 11.8 percent stake in the combined group.

The combined business will be led by Tony Lucki, the chairman and chief executive of Houghton Mifflin and the former CEO of Harcourt Education.

"Together, we will be better positioned to meet the changing needs of educators and students in a wider range of subjects, states and school districts," Lucki said.

Harcourt publishes textbooks and related educational supplements for students from pre-kindergarten to high school. It also produces adult education, reference, religious and online learning materials.

The deal is expected to close in late 2007 or early 2008 after regulatory reviews are completed, the companies said.

If approved, the market will be dominated by three publishers: Pearson Plc (PSON.L), McGraw-Hill Cos. Inc. (MHP.N) and Houghton Mifflin.

One antitrust lawyer knowledgeable about the industry who wished to remain anonymous said the deal will "raise eyebrows" with U.S. regulators because Houghton and Harcourt are among a handful of large publishers who supply school textbooks.

The lawyer also noted that antitrust officials have not been aggressive in challenging mergers in recent years.

Jeremy Dickens, president of Houghton Mifflin Riverdeep, said the companies had studied the antitrust issues. "Our view is that the pro-competitive aspects of this transaction so clearly outweigh any potential negative effects of the combination that we don't envision a substantial problem, if any, with the regulators," he told Reuters.

RETURNING PROCEEDS

Dublin-based educational software publisher Riverdeep, headed by Irish entrepreneur Barry O'Callaghan, bought textbook publisher Houghton Mifflin from a group of private equity firms last year for $1.75 billion. Both Houghton Mifflin and Harcourt ring up nearly all of their sales in the United States.

Dickens said that because of the overlap, there should be room for savings from the deal, but declined to estimate how much could be saved or how many jobs are at risk.

Meanwhile, ABN AMRO analyst Paul Gooden said the price is a bit higher than his team's anticipated value of $3.7 billion.

"Since we put our forecast out, the dollar has gone against them a little bit; but ($4 billion) is slightly better than expected," he said.

Reed Elsevier repeated its plans to return the education unit proceeds to shareholders by way of a special dividend. It expects exiting education to boost earnings per share on a constant currency basis by at least 10 percent annually.

UBS advised Reed Elsevier, while Citigroup, Lehman Brothers and Credit Suisse advised Houghton and are providing debt financing for the transaction.

Shares of Reed closed in London up 1.7 percent at 675 pence.

Reed had previously sold Harcourt's international and assessment units to Pearson for $950 million.

The total sale of Harcourt Education would represent a multiple of 20.8 times 2006 adjusted operating profit, Reed said. Total revenue was $1.6 billion last year.

Thomson Corp. TOC.TO, which is buying Reuters Group Plc RTR.L RTRSY.O, sold its education assets to Apax Partners APAX.UL and Canada's OMERS Capital Partners for $7.75 billion earlier this year.

Dutch publisher Wolters Kluwer NV (WLSNc.AS) also sold its education division to private equity firm Bridgepoint for about $1 billion last month.

(Additional reporting by Gavin Haycock and Richard Barley in London; Paul Thomasch in New York and Peter Kaplan in Washington D.C.)