Houghton Mifflin Harcourt IPO To Only Benefit Paulson & Co. And Friends

| About: HMH Holdings (HMHC)

Houghton Mifflin Harcourt (NASDAQ:HMHC), a global provider of education products and solutions with principal offices in Boston, Massachusetts, plans to raise $273.8 million in its upcoming IPO. The San Diego, California-based firm will offer 18.3 million shares at an expected price range of $14-$16 per share. At the midpoint of that range at $15 per share, HMHC will command a market value of $2.1 billion.

Notably, 100% of the shares to be offered are insider shares owned by Paulson & Co. and five other prestigious private equity firms. The company will not get any proceeds even though it is losing huge amounts of money.


HMHC filed on August 2, 2013.
Lead Underwriters: Goldman Sachs & Co, Morgan Stanley & Co LLC
Underwriters: Blackstone Advisory Partners LP, BMO Capital Markets Corp, Castle Oak Securities LP, Citigroup Global Markets, Credit Suisse Securities LLC, Piper Jaffray & Co, Samuel A. Ramirez & Company Inc, Stifel Nicolaus & Company, Wells Fargo Securities LLC

HMHC is a global provider of educational content, technology, services and media. The firm currently reaches over 50 million students in over 150 countries worldwide, and is the leading provider of education in the American K-12 market by market share - the firm estimates that its content has reached nearly every American student at some point during the educational process.

The firm has been publishing trade and reference materials since 1832, and its publications have been awarded Pulitzer Prizes, Newbery and Caldecott medals, and the National Book Award. Its repertoire also includes highly recognizable titles like Curious George, Carmen Sandiego, The Oregon Trail, The Little Prince, The Lord of the Rings, Life of Pi, Webster's New World Dictionary and Cliffs Notes.

It should be noted that the HMHC was devastated and voluntarily entered bankruptcy as a result of the global financial crisis, posting shocking losses of nearly $1 billion in 2010 and over $2 billion in 2011, and only emerged from bankruptcy in 2012.

HMHC offers the following figures in its S-1 balance sheet for the nine months ending September 30, 2013:

Revenue: $1,079,735,000
Net Loss: ($46,535,000)
Total Assets: $3,066,632,000
Total Liabilities: $1,162,525,000
Stockholders' Equity: $1,904,107,000

In calendar 2012, 2011 and 2010, HMHC's total net sales were $1,285.6 million, $1,295.3 million and $1,507.0 million, respectively. Over the same periods, the firm posted net losses of $87.1 million, $2,182.4 million and $819.5 million, respectively.

HMHC must compete with numerous other firms offering educational solutions, some of which are equally well-established names. Major competitors include Pearson Education (NYSE:PSO), McGraw Hill Education, Cengage Learning, Scholastic Corporation (NASDAQ:SCHL) and K12 (NYSE:LRN).

The firm must also compete with rising online firms offering educational solutions, like the soon-to-IPO Chegg (NYSE:CHGG).

President and CEO Linda K. Zecher joined HMHC in 2011. Her compensation for 2012 was an unbelievable $11,922,671. She previously served as Corporate Vice President of Microsoft's (NASDAQ:MSFT) Worldwide Public Sector organization and as Microsoft's Vice President Public Sector, Americas and Asia Pacific and Vice President, U.S. Public Sector. Prior to joining Microsoft, Ms. Zecher held leadership positions with Texas Instruments (NYSE:TXN), Bank of America (NYSE:BAC), PeopleSoft, Oracle (NASDAQ:ORCL) and Evolve Corp.

We acknowledge that she appears to have a strong background to turn this ship around and someday may make money for the shareholders and not just for her management team and her private equity bosses.

We are currently neutral to negative on this I.P.O. at the proposed price range of $14 to $16. We would revisit the deal if it prices in the $12 to $13 range.

The firm's recent bankruptcy concerns us and well as the huge losses and unbelievable compensation paid to senior executives that are losing money for the existing owners. We are also not very comfortable that all of the proceeds are going to bail out the private equity owners. It would have been nice to see a portion of the proceeds going to the company to bolster it's balance sheet. We also believe that book publishers will continue to come under increased competition from the e-tailers like Amazon (NASDAQ:AMZN).

Prospective investors should also carefully read the potpourri of risk factors on pages 12 to 24 of the S-1. The company, the underwriters and the Wall Street lawyers at Paul, Weiss and Latham & Watkins have done an incredible job of listing every possible event that could go wrong for new shareholders. It's truly worth studying those twelve pages. Investors will find it more fascinating than HMHC's "The Little Prince".

In must be noted that the firm's extremely well-known branding will likely propel the IPO to some level of success, and HMHC does seem to be approaching profitability again. Given the growing market for education materials around the world, particularly in the developing world, and HMHC's established global presence, there should be opportunity for the firm to grow modestly and to continue its leadership in the field of education solutions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.