==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE TO
(Rule 14d-100)
TENDER OFFER STATEMENT UNDER SECTION 14(d)(1)
OR SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934
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HOUGHTON MIFFLIN COMPANY
(Name of Subject Company (Issuer))
VIVENDI UNIVERSAL, S.A.
SORAYA MERGER INC.
(Names of Filing Persons (Offerors))
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COMMON STOCK, PAR VALUE $1.00 PER SHARE
(including associated rights)
(Title of Class of Securities)
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44156010
(CUSIP Number of Class of Securities)
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George E. Bushnell, III, Esq.
c/o Vivendi Universal Holding I Corp.
800 Third Avenue, Seventh Floor
New York, New York 10022
Telephone: 212-572-7855
(Name, address and telephone number of person authorized to receive
notices and communications on behalf of filing persons)
Copy to:
Faiza J. Saeed, Esq.
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019
Telephone: (212) 474-1000
Calculation of Filing Fee:
==============================================================================
Transaction Valuation* Amount of Filing Fee
------------------------------------------------------------------------------
Not applicable. Not applicable.
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*Set forth in the amount on which the filing fee is calculated and state how
it was determined.
[X] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
Check the appropriate boxes to designate any transactions to which this
statement relates:
[X] third-party tender offer subject to Rule 14d-1.
[ ] issuer tender offer subject to Rule 13e-4.
[ ] going-private transaction subject to Rule 13e-3.
[ ] amendment to Schedule 13D under Rule 13d-2.
Check the following box if the filing is a final amendment reporting the
results of the tender offer: [ ]
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The description contained herein is neither an offer to purchase nor a
solicitation of an offer to sell shares of Houghton Mifflin Company. At the
time the tender offer is commenced, Vivendi Universal will file a Tender Offer
Statement and Houghton Mifflin Company will file a Solicitation/Recommendation
Statement with respect to the offer. The Tender Offer Statement (including an
offer to purchase, a related letter of transmittal and other offer documents)
and the Solicitation/Recommendation Statement will contain important
information that should be read carefully before any decision is made with
respect to the offer.
The offer to purchase, the related letter of transmittal and certain other
documents, as well as the Solicitation/Recommendation Statement, will be made
available to all shareholders of Houghton Mifflin Company, at no expense to
them. The Tender Offer Statement (including an offer to purchase, a related
letter of transmittal and other offer documents) and the
Solicitation/Recommendation Statement will also be available at no charge at
the SEC's website at www.sec.gov.
SEAGRAM CO LT
Moderator: Ariane Delamaze
June 1, 2001/11:00 a.m. CDT
Page 1
SEAGRAM CO LT
June 1, 2001
11:00 a.m. CDT
Coordinator Good afternoon and welcome to the Vivendi Universal analyst
conference call. At the company's request, today's conference
call is being recorded. Following today's presentation, there
will be a question and answer session. Instructions will be
given at that time.
Now, I would like to introduce your speakers for today's
call, Mr. Jean-Marie Messier, Chairman and Chief Executive
Officer of Vivendi Universal and Ms. Agnes Touraine, Vice
Chairman and CEO of Vivendi Universal Publishing. Also, we
have Mr. Nader Darehshori, CEO and Chairman of the
Houghton-Mifflin Publishing Company. Thank you, you may
begin.
JM. Messier Hi to everyone. I just want to make a few short comments
after the introductions, before going to your questions. On
my side, I've two
points. You know that what we are speaking today, the tender
offer that we are launching Houghton-Mifflin at $60 per
share, for a total consideration of $1.8 billion. Through
this acquisition, Vivendi Universal will become the number
two worldwide player in the education field, and not only
number two on a worldwide basis, but global players, 50/50
between the U.S. and non-U.S. countries, global resources
from multi-language vis-a-vis positions in English and
Spanish, Portugese and exotic French language.
This acquisition has to be refinanced and will be refinanced
by the disposals of some of our assets, namely the free
sheets, trade fair and professional press businesses. What we
are doing there is that we will finance 100% of these
acquisitions through internal resources, that's not hurting
in any way the balance sheet of Vivendi Universal, and
through a portfolio arbitrage, where we are exiting national
businesses to gain international and worldwide position,
where we are exiting more cyclical businesses in favor of
more stable growing businesses and where we are exiting
non-core publishing assets to core publishing assets. So
that's the transactions that we are going to speak about.
These transactions are accretive for shareholders in terms of
EBITDA per share, and will be favorable in terms of cash flow
of the group from year one. Just before going to your
questions and before leaving the floor to Agnes Touraine to
explain to you a little bit about one key point, which is the
synergies and the high synergies that we are expecting and
where they will come from, I just want to restate that this
acquisition is in Vivendi Universal's content strategy.
We will and we have targeted selectively some key edutainment
content fields where we are looking to one simple goal,
that's worldwide leadership. And we will stay only in those
fields where we can achieve a worldwide position, where are
we, vis-a-vis this simple strategy. Music, that's done, we
are number one. Movies, that's done, we're number one. Games,
that's done, we're number one and number two worldwide,
depending on the criteria that you follow. Sports, that's
done in Europe. Education, through this acquisition it will
be done with the number two worldwide leadership, so that
clearly where this acquisition is fully fitting was Vivendi
Universal's strategy.
I've asked Agnes Touraine to comment a little bit on the
costs and revenue synergies before going to your questions.
Agnes Touraine is chairing all Vivendi Universal Publishing
activities.
A. Touraine Good morning. We estimate, probably, that the acquisition
will generate immediate cost synergy of $14 million, this is
the cost side, and especially in three fields. The first one
is production on paper purchasing, printing and binding.
During the due diligence we found out that the cost of paper
was really higher in the United States compared to what we
have in the rest of the world, and obviously combining our
operations, going out to $2.2 billion, we are going to get
leverage on paper purchasing, printing and binding.
We do have also cost savings in logistics. To give you an
example, in Indianapolis there are two warehouses, obviously,
we can keep only one, knowing that we do have a lot of
distribution facilities exactly in the same locations. We do
have also distribution facilities on CD-ROM on the West
Coast, so we estimate that, again, here we do have immediate
savings. We do estimate the production and the logistic
synergies to be around $20 million.
The second aspect of synergy is restructuring of our U.S.
operations. As you know, two years ago we bought Cendant
Software. Cendant Software is basically in education CD-ROM
and game. Immediately the education software which is CD-ROM
and distribution of CD-ROM, will be dispatched to
Houghton-Mifflin. That means that we will be able to decrease
the headquarters on the West Coast, and this will amount to
$20 million.
The third one which should be immediate also is G&A within
Houghton-Mifflin, because the company is not going to be
listed any more and because Vivendi Universal will take care
of cash management, investor relations, obviously we will
decrease the G&A within Houghton-Mifflin. So those three
points explain the $14 million, and we're absolutely
convinced that we can get this in the coming 18 months and
for the a little bit more after more analysis.
On the revenue side and technology synergy, obviously this
will come from the combination of our activities, first of
all on digitalization. We do have expertise on digitalization
of our content and especially in Europe, Houghton-Mifflin is
maybe a little bit behind, so immediately our team will
really improve the way books have been digitalized within
Houghton-
Mifflin and digitalization will really put an impact on the
cost of goods sold. So immediately we will have an in
production new way of producing books here and immediate
savings.
Another example, our revenue synergy that image data bank. We
did put in place, between Europe and South America, as you
know we are number the one in France, Spain and Brazil in
education. We already put in place an image data bank in
order for the publishers to get access to the images online.
So we will expand this immediately to Houghton-Mifflin.
The third point, very important in revenue synergy, is
content combination. Education is going more and more towards
customization, which is a very important trend everywhere in
the world. That means that in the coming two or three years,
more and more we will sell not only a product, not only a
book, but a combination of what we call a paper book, e-book,
Internet access and other services to schools and teachers,
having again, a digitalized content and the know how of
customization will help tremendously.
The last point, our revenue synergy is international.
Houghton-Mifflin is 97% U.S. based, in terms of revenue, we
firmly believe that Houghton-
Mifflin could export content and especially in South America
and even in Europe, we do estimate at least should be at
minimum 20%, so this will have, obviously, an immediate
impact on the cost of producing our books in the other
countries.
The last point is technology and Internet-related costs.
Houghton-Mifflin did invest around $100 million in Internet
activities during the last two years. We did invest also in
the Internet, and especially with Education.com.
Education.com was launched three months ago in the U.S.,
England, Germany and France, so Education.com has very
powerful engines and tools, and those engines and tools
obviously now should be within Houghton-Mifflin and will have
the Houghton-Mifflin content. So this will be our strategy,
which is local content and global IT, and having economies of
scale in terms of technology know-how and Internet
investments. So we truly believe that in the coming 18
months, we should reach a total of $75 million synergy at the
EBITDA level.
JM. Messier Okay, we are now ready to go for your questions. Obviously,
we wish that you focus your questions on Houghton-Mifflin
tender offer. Nevertheless, if you have a few other questions
relating to Vivendi Universal activities, we will be pleased
to hear them. Just a final point,
you have to know that this acquisition comes from just taking
place at the end of the first senior executive management
team of Vivendi Universal, which took place over the last
three days in Orlando. This has been an incredibly positive,
dynamic, encouraging supporting meeting for all the
developments, the cross-marketing ideas and the dynamisms and
the wish of all different teams to procure some Vivendi
Universal execution.
We are now ready to take your questions.
Coordinator Our first question comes from Peter Apert, and sir, your line
is open. Please state your company name.
P. Apert Good morning. It's Deutsche Bank, Alex Brown. Just a couple
of questions on the logistics of the transaction. Number one,
is there a break up fee associated with the deal? Can you
tell us what the amount is? Number two, your thoughts on the
timing around when the deal might close. And I guess really
for Nader, the question is whether he had discussions with
any other potential bidders? Thank you.
JM. Messier On the first point, yes, there is a break up fee. That's a 2%
break up fee. The second question, timing, that's classical
tender of timing. We do not
expect any specific difficulty in this timetable, so we hope
to be on the fast track there, and we hope to have completed
the tender before the end of July. The rest was your
question, Nader.
N. Darehshori Peter, thank you. No, the company, we did not put
Houghton-Mifflin on the block, we didn't talk to any other
people. We were impressed with the management's passion for
growth, dedication to quality and the ability to take our
products globally and help us to digitize our products so
they are available globally. And last but not least, they
were able to make an offer for our investors that we thought
was highly attractive, so therefore we didn't feel that it's
necessary to talk to anyone else.
P. Apert Thank you.
Coordinator Our next question comes from Irene Nattel. Ma'am, your line
is now open, please state your company name.
I. Nattel Thank you. Irene Nattel, RBC Dominion Securities. Good
afternoon. I'd just like to talk for a moment about the
financing of the acquisition. If we look at the assets to be
divested, it looks like the profitability is quite a bit
lower than the assets that you're acquiring, which is a good
thing. But that
also leads me to conclude that you probably won't get quite
as much for them. First of all, am I correct in that
assumption? And second of all, will you be using internally
generated cash flow to make up the difference?
JM. Messier I'm going to answer both your questions. The first one is
that, obviously, we intend to help Houghton-Mifflin to
improve its already significant level of profitability at 25%
EBITDA, and as you realize, the synergies that Agnes Touraine
has commented on represent 25% of the existing EBITDA margins
of Houghton-Mifflin. That's a very substantial improvement
for the future.
Second, I think that the assets that we are selling
represents even if that's not in our strategy because they
are local and because they are cyclical and because we cannot
expect to reach the worldwide leadership in those fields,
that represents very attractive assets for international
groups focusing on trade fair, free sheets or professional
information. And to be very candid about this, our
expectation is that we may be able to sell those assets on a
higher EBITDA multiple than the EBITDA multiple of the
acquisitions of Houghton-Mifflin, because of the specificity
of those assets on the European market.
So let's put it that way, we do expect that the sales of
trade magazines and shows and the free sheets Comareg will
represent at least 70-75% of the total cost of acquisitions
of Houghton-Mifflin. Down the road, our clear strategy is
before the end of 2002, 100% of Houghton-Mifflin acquisitions
will have been refinanced by the sales of assets of Vivendi
Universal and by arbitrage within our portfolio That's a
clear goal, that we will fully finance this acquisition
through arbitrage in our portfolio.
I. Nattel That's excellent, thank you. And one final question, if I
may, have you had any discussions with prospective buyers at
this point?
JM. Messier Obviously, I'm not going to comment, as you are expecting, on
any potential name. The answer to your question is yes, this
process has started and we expect to conduct it diligently.
We have only goal, there is no privileged or preferred buyer,
we will sell those assets to the highest offer price.
I. Nattel That's excellent. Thank you very much.
Coordinator Our next question comes from Richard Simon. Sir, your line is
now open, please state your company name.
R. Simon Yes, just a pro forma question. Can you just run through the
steps to get pro forma 2000 and guidance for 2001, taking
into account the reported EBITDA of Houghton-Mifflin, the
synergy benefits on a full year run rate and then net out the
assets that are disposed of to help finance the acquisition.
JM. Messier What we can say is that for 2000/2001, what we are expecting
on the Houghton-Mifflin side, obviously, 2001 is quite an
important year, in terms of adoption. So that results in
significant growth in revenues, that we expect to be on top
and higher than 10%, that's to say double digit revenue
growth in 2001, a strong adoption year. We expect, before the
synergies, the EBITDA, on a standalone basis, to be close to
the current level, that's to say the 25% EBITDA before book
plate amortization margin. After this book plate
amortization, we expect to remain in 18% or slightly over 18%
margin, and EBITDA roughly 16% plus. It would lead you,
Richard, to EBITDA standalone a little bit north of 290
million euros, and after book plate amortization, around 210.
On the impact ...on the VU financials, if you consider for
2001 and half a year impact, it will reserve, it's safe to
assume, the second half EBITDA 2001 no synergies and no one,
of course for 2001, half year financing
impact and no deconsolidation of Comareg and VUP trade, it
leads to an additional EBITDA of roughly 245 million euros
and EBIT less the financial costs plus 115 million euros. In
terms of EBITDA per share, that is an accretion, very close
to 3%. If we review pro forma 2001, its full year impact with
the following assumptions, assuming full year EBITDA,
assuming the 75 million euros of synergy, assuming the full
year financial impact, assuming deconsolidation of Comareg
and VUP trade, it leads then to an accretion in EBITDA of
close to 190 million euros. That's an accretion of EBITDA per
share 2001, pro forma, full year slightly over 2%, and at the
EBIT less financial costs, very close to the previous number,
an additional 110 to 115 million euros.
R. Simon Thank you very much. That was helpful.
Coordinator Our next question comes from Neal Blakely. Sir, your line is
now open, please state your company name.
N. Blakely Neil Blakely of Merrill Lynch. First of all, I was wondering
if you could give the current year, an idea of the
seasonality between quarters. It's obviously very second half
weighted, but actually give an idea of that as far as the
revenues go. Then also, this deal does give you a kind of
toehold in the trade book area. I was wondering what your
plans were there. Do you anticipate selling that or do you
think that you could actually beef that up and become a
significant player in the trade books area?
JM. Messier The first question is on seasonality, Agnes or Nader?
N. Darehshori Our business, and one of the reasons why we thought this as a
very attractive possibility, joining forces with Vivendi
Universal, is that our business is very seasonal and very
cyclical, we lose money three-quarters of the year and we
make all of our money in the third quarter. We have had
difficulty making investors understand that and even
newspapers in Boston, they don't understand our cyclicality.
So I think that being part of Vivendi will help the company
not to be as dependent on the cyclicality of our business,
and it may help it. The educational business in the United
States, and I'm sure abroad, is very cyclical, and you know
that.
JM. Messier I would say seasonal more than cyclical. That's to say that
the strongest link to the education market by itself is
seasonal in the way that most of it is happening in quarter
three.
N. Darehshori The third quarter, yes.
N. Blakely What percentage of revenues would be in quarter three, for
example?
N. Darehshori I'm sorry?
N. Blakely What percentage of revenues would be in quarter three?
N. Darehshori Roughly 60%.
JM. Messier Did you hear the answer? That's between 50% and 60%.
A. Touraine On the trade part of it, one of the key points here is to say
that in France and in Europe, in trade activity, we do around
$160 million with high profitability for the trade. And I
must say that within Houghton-Mifflin the trade and reference
division is doing very well also. If I remember properly, the
profitability is around 20% a little bit more, and we see
another opportunity in combining trade activity in the U.S.
with the one we have in Europe, and especially in terms of,
again, combining content here.
So for the time being, and considering the quality of the
trade division and the very good performance of our trade
division in Europe, we may think that we do have a great
future altogether within this trade activity. Don't forget
that in the trade you have also our reference and
dictionaries, and with the Larousse brand, we do have a
varied composition on a worldwide basis and especially in
South America, we were lacking a dictionary and an
encyclopedia in the U.S. and that's made great pains,
especially for education that comes in terms of content.
N. Blakely Thanks very much.
N. Darehshori We also have synergy with Universal movie deals that we
haven't even talked about. But that's a very important part
of the future growth.
JM. Messier It's clear that we are trying to develop all our products on
all supports and as many of you have already seen, one very
good example was The Mummy Returns, where not only the movie
is achieving, as of today, $250 million turnover, on its way
to do more than $500 million on a worldwide basis, but there
will be the videos, DVD's, there is a spin-off with scorpion
king they are the certified global licensees of consumer
products, the attractions in the price the books, published
in different languages, the
interactive games already worked out on GameBoy and
PlayStation II. To a large extent, The Mummy Returns is a
good presentation of what we expect to do, that's to say,
keep most of the value linked to our content and our
franchises by accessing customers through every single
support and means that it likes to be confronted with in the
entertainment field.
Following question?
Coordinator Our next question comes from Michael Nelson. Sir, your line
is open, please state your company name. Hello, Mr. Nelson,
we're unable to hear you at this time. Please check your mute
button.
JM. Messier Let's go to the next question.
Coordinator Brandon Dobel, your line is now open. Please state your
company name.
B. Dobel Brandon Dobel from Credit Suisse First Boston. I wonder if
you could address your possible plans for the college market.
It seems like most of the conversation so far has focused on
K-12. I wonder what your thoughts are on Houghton's college
assets and the potential there.
N. Darehshori Our college division is the fourth largest college publisher
in America. What is important about it is to realize that
wherever we are players, we are formidable players. We are
either a formidable player in a discipline when we
participate or we don't participate. Other opportunities 36
possible discipline in college, we play in 18 of them and on
those 18 disciplines that we play, we're either number one or
number two, at minimum number three. So we have a very strong
position there.
The other aspect of why college would be highly attractive to
Vivendi Universal is the attractiveness of American college
textbooks internationally. Our competitors who have
international visibilities and capabilities, they have the
largest percentage of college sales in international markets
than we do. And I think that partnerships with Vivendi and
becoming part of Vivendi Universal, we won't be able to take
college products immediately abroad in the international
markets, and it will be highly attractive and profitable.
A. Touraine What is important to note is that within our organization and
education, we do have four divisions, which are school,
basically textbook, home education, e-learning and reference
and dictionaries. E-learning is the chief priority for us. We
strongly believe that we can grow by organic
growth in the coming months and years, and obviously, the
college activity in the U.S., but also the one we have in
France and Spain and a little bit in South America, will
really help in order to accelerate our penetration in the
e-learning market. As you know, one of our main competitors
Pearson did invest heavily in this field a year ago, and we
strongly believe that with the security we have and the
content we have, we probably may catch up without having to
do so high investments.
B. Dobel Thanks a lot. I appreciate it.
Coordinator Our next question comes from Kara Chesaby. Ma'am, your line
is now open, please state your company name.
K. Chesaby Kara Chesaby of T. Rowe Price. What role will the current
Houghton management play in the management of the education
business under the Vivendi umbrella?
A. Touraine Obviously, it will be a key because as you know we bought a
company basically with people who we have been very impressed
with the quality of the management and especially the head of
the operations. So considering profitability, the operations
manager should apparently
remain. I think one of the key priorities we may have is to
make sure that they are going to work with the other
publishers on a worldwide basis, and again, to put in place
synergies very quickly. One of the weaknesses of
Houghton-Mifflin, again, is the digital aspect, the
e-production side and e-distribution is not probably
completely updated, as of now. So with the management that's
in place right now, who are Houghton Mifflin education we
shall add a very strong team, in terms of IT digitalization
and the Internet.
K. Chesaby And will Nader be staying on in the integration, and for how
long?
N. Darehshori I've spent probably 20 meetings with the management of
Vivendi Universal, and the topic that we have not discussed
has been my role here. However, I have made a commitment to
stay as long as needed to make this transaction work and work
well. I'm willing to do that and I have made an announcement
that I will retire in April. I think we have plenty of time
to work on this transition, and though we have had no
discussion, I'm willing and I want to help them to make this
transition really a successful one.
JM. Messier Thank you, Nader. Do we have following questions?
Coordinator Our next question comes from Ed Venable. Sir, your line is
open, please state your company name.
A. Gordon-Brown Hello, it's Andrew Gordon-Brown from JP Morgan. Just a quick
question on what assets are planned for disposal and what
you're keeping. I notice in the press release that you say
that you're going to be hanging on to your presence in news
and economic publications. I was just trying to get a feel
for, given that there's publicly available information on the
revenue and EBITDA or the business information assets, what
is the revenue and EBITDA of the news and economic
publications that you plan to keep? Just so that we can get a
sense of the base of what you're planning to sell.
JM. Messier Agnes is going to tell you what the size of the news and
economic publication within the Group. Let me put it this
way. This is a news magazine, a French journal. We are in a
presidential race here. It's very important not to disturb
this activity during such a sensitive period. And it's
representing, Agnes?
A. Touraine Almost 200 million euros in terms of revenue and around 10%
profitability.
A. Gordon-Brown Did you say 200?
A. Touraine Yes, 200.
A. Gordon-Brown And when you talk about profitability, are we talking EBITDA
margins?
A. Touraine Yes, EBITDA.
JM. Messier EBITDA, yes.
A. Gordon-Brown That's very useful. Thank you very much.
Coordinator Our next question comes from Neal Shelton. Sir, your line is
now open, please state your company name.
N. Shelton Hello, this is Neal Shelton from Shroders Salomon Smith
Barney. Two very quick questions. You talked about the EBITDA
accretion for this year. Can you talk about the EPS accretion
or dilution for this year and for next, please. And lastly,
on your slides, you detail your sales by division or by
territory, where you say that you're number one in Spain
and number four in the U.S. Can you actually flesh out and
give us the absolute level of sales in each of those
territories. Thank you.
JM. Messier Do you have on the street of the sales by zone, Agnes?
A. Touraine Yes, we do it by division, but let me just find my paper.
Just to review the number in Spain, Anaya in Spain is about
250 million euros, France is about 300 million euros, in
Brazil it's around 160 million euros. In the U.S., Knowledge
Adventure plus our education role distribution is around 185
million euros. I think you have all of it.
N. Shelton I think that's it, yes.
A. Touraine After the completion of the acquisition basically you will
have 50% in the U.S. and 50% in Europe and the rest of the
world, and the rest of the world basically is Spain, France
and Brazil, knowing that we have a very good position in that
countries with a lot of activity and a position also in
Argentina, Colombia and Chile.
JM. Messier For your first question, I think that you got all the figures
relating to EBITDA. If you want to go to cash earnings for
2001, I'm assuming
we're closing July, the cash earnings impact of this
acquisition is positive by 110, perhaps slightly more than
that, in 2001, cash earnings of Vivendi Universal, and next
year, on the basis of the full year impact with the
deconsolidation of the sold businesses and with the financial
impact, that's an additional contribution to cash earnings of
the group positive impact of several thousand million euros
next year. So this is both an accretive and a positive
contribution on a full year basis, both at the EBITDA and
cash earnings level.
N. Shelton Thank you. And just to sort of follow up on a question. You
talked about the third quarter being so important for
Houghton-Mifflin. Do you think you'll complete the
transaction before the end of the third quarter in this year?
JM. Messier Yes, we do expect to close the transaction by the end of July.
N. Shelton Thank you very much.
Coordinator Our next question comes from Jeff Mays. Your line is now
open, please state your company name.
J. Mays Thank you. I've got a question about the college publishing
part of your business. Looking at the last three years'
numbers, the sales have been sort of hovering around $170 to
$175 million. Also for this year you're expecting $175
million in sales, so actually no growth. Can you explain
what's going on in that market. And also, are you looking to
expand in this area? Because your market share is relatively
weak, relative to other players.
N. Darehshori The college market is going through this transition of moving
solely from paper flatboard to a combination of technology
and paper, and I think that's one of the reasons the college
industry has not had the great growth that we have seen in
other industries. However, I think digitalization and content
on Internet platforms is going to get to college faster than
any other place, and that is going to make the college
business very attractive in this country and abroad.
J. Mays Are you seeking to expand in this business?
A. Touraine I think one way to expand to this business, again is to move
forward much more quickly in terms of digitalization and
delivering the contents on multi formats That means,
obviously, on the multiple print books CD-
ROM and Internet. We have in this company, to accelerate
very, very quickly the e-production side in order to make
sure that books are produced on a digital content, in order
for those books, again, to be, first of all produced at a
less expensive cost and able to be delivered on other
platforms than paper. So one of the key issues for this
division now is to move forward and more quickly to the
digital age, in order to get market share.
J. Mays Thank you.
Coordinator Our next question comes from Mark Brailey. Sir, your line is
now open, please state your company name.
M. Brailey It's Mike Brailey from Casanov. I wonder if you can just talk
us through the key adoptions for Houghton in the coming year
and also in 2002, and sort of any early feel for how you
think those are going.
N. Darehshori The key adoptions this year were both English in Texas,
literature in Texas and mathematics in California, we were
doing very well. As a matter of fact, the orders are coming
very strong from Texas. Texas normally sends their orders in
early. We are doing far better than we had
expected with the entire program, both elementary and
secondary. In California, in the mathematics program, in six
to eight there are only three programs listed this year, two
of them are Houghton-Mifflin programs, and the third program
that is listed by Pearson is six to seven and eight programs
when our two programs are six, seven and eight. So we're
doing extremely well over there.
Going forward, our major adoption next year will be
California reading, and we are going to offer a very strong
program for California next year. Fortunately for us, we are
going to have only two competitors playing in the California
reading market next year, because the third one, Pearson
doesn't have a complete program to offer in California, so
we're very positive about our possibilities with reading in
California.
M. Brailey And a follow up, if I may. Obviously, you had quite a tough
time of it last year. Are there any particular areas where
you think you need to sort of reinvest more of the margin in
order to grow the business more strongly? And if so, is it in
the products or is it in the marketing or is it in the new
media?
N. Darehshori We didn't have a tough time last year, we had pretty good
growth. After all, our margin increased and we had growth.
The thing that you are probably stating is that we fell below
our goal that we had set for ourselves five years earlier,
but we did very well. The only area we did worse than we had
anticipated was with science in Texas. And we were not the
only publisher. There was only one successful publisher in
science in Texas, and that was Harcourt-Brace. The rest of us
all suffered. However, that science program that we didn't do
as well in Texas, is doing extremely well in California this
year.
M. Brailey Can you just talk us through what's helped it do better in
California this year. Is it being marketed more aggressively?
Have you actually upgraded the program at all?
N. Darehshori I think that we learned from our Texas experience with the
science and now with technology, we are able to develop our
products early and take it to market early and class test it,
get reaction to it. I think we are a lot more prepared to not
only develop better programs, but also market it early
enough, get feedback early enough that we will be
ssuccessful. Now what we have been able to do within the
Universal Group brings to Houghton-Mifflin is this idea of
helping us digitize some of these products that are
highly expensive to do. And also that digitization allows us
to take the products that we've developed here and some
version of it internationally.
A. Touraine I think one of the key points here, again, Houghton Mifflin
did invest $100 million last year, what is important here,
it's probably $.02 less and a little bit better. That means
that a key priority is not so much to invest on the Internet,
a little bit everywhere, but the key priority is to decrease
the total investment on the Internet a little bit everywhere
and to make sure that we put the proper investment, again, on
e-production. And again, when you produce, on a digital
format, at the end of it, it's less expensive, it's exactly
what we have in Europe now, and to put a lot inside these
e-distribution and making sure that we're going to leverage
what we have on the Internet on Education.com.
Basically, it's going to be investing less, in terms of
Internet related products everywhere, but it's going to be
investing selectively and with, again, a processed return on
e-production, e-distribution and DRM digital write
management. So, it's probably going to be an important
investment, but much more selective and using, again, the
know-how we do have in Europe, using the engines we have and
using the tools we already developed in the other publishing
houses.
M. Brailey Okay, thank you.
Coordinator Our next question comes from Neal Carter. Sir, your line is
now open, please state your company name.
N. Carter Hello it's Neal Carter from ABN Amro. A quick question about
Education.com. I wonder if you can tell me what you think the
potential is for that marketplace and what sort of sales you
think you can be achieving for Education.com by 2003 or 2005.
A. Touraine Education.com, as you know, we launched it actually four
months ago, in February. The business model is relying on
three things. The first one is description and basically in
Europe we're the number one in what we call "virtual
classes." That means that you pay in order for your kids to
be in the virtual classes. The second way of the business
model is e-commerce and the third one is advertising for
around ten persons also. We plan to break-even on
Education.com at the end of 2002. We should make it. Again,
it's a little bit too early, five months after the launch,
but I must say that the U.S./West side is kind of good,
probably better at this time than the European ones.
What is really nice with Education.com is the fact that we do
share the tools and the engine all over the world and we even
sell part of those tools to other countries like East Europe.
We plan to open Education.com in Brazil, so within
Education.com you have three parts, really, the teacher one,
the parent part and the kids part. The teacher one is very
important because it's kind of the relationship that we did
between the publishers and the teachers, and again, this may
replace part of the, I don't know, when you have 200 Web
sites, I think, it may replace part of the Web sites
Houghton-Mifflin has as of today. So if it changes the
business model specifically it would diminish your costs
within Houghton-Mifflin. On the subscription part, we have to
wait until back to school, in September, to find out the
success of the actual classes.
N. Carter What do you think the revenue percentage is for these kind of
businesses? It seems that Pierson is a little less optimistic
about the learning network than they used to be. Are you
still confident that this is going to be a big business?
A. Touraine Obviously, we strongly believe that all of the platforms are
going to co-habitate, so that's especially an indication of
what's really nice in education about digitalization is going
to be a revolution but it will take more time than in other
businesses. We believe that in the coming years we will have
more and more combined products, again, a paper book that
will last for a long time, e-books, probably and as you know,
we do have in France a very important experimentation on
electronic school bag. You will have access to the Internet
and you will have access to information database and
reference database.
So basically we strongly believe that it's not so much a
matter of saying, "Is the Internet going to replace the
teacher?" The name of the game is the coming two to five
years is to make sure that we are going to deliver to the
education players not only a product but a service. And the
next step will be an integrated learning system, that
probably will take three to five years, again, to develop,
but the first year I think is really great for education,
however, which is probably good news, it's going to take a
little bit more time and a little bit less hype, which is
good also, in the other fields. So it's a matter, again, of
services rather than product and it's a matter of
multi-platform strategies rather than having to choose one
platform.
JM. Messier And your question relating to competition vis-a-vis Pierson,
if I can add two points. One of our competitive advantages is
clearly to be, in this field, as in others, a multi-language
company, and in fact, to be not only strong in English but
strong in Spanish and Portuguese and different languages, is
a clear differentiator and is a clear benefit on the Vivendi
Universal side, one of the major Spanish markets being the
U.S. one, obviously. The second competitive difference is
based on our strength on the educational software side, where
obviously we can leverage online the access by educational
software, who like the contents and the brands and online is
the immediate follow up of the CD-ROM and educational
software. And the 170 million people each year buying all
educational software are clear educated, let's call them
easier clients for online additional subscription offers. I
think that on these two points we have an edge and we are
clearly ahead of Pierson.
N. Carter Thanks very much.
Coordinator Our next question comes from Louis Sarkus. Sir, your line is
open, please state your company name.
L. Sarkus The company is Chesapeake Partners. Just a couple of really
clarifying questions here. Jean-Marie, you've talked about
the asset sales for refinancing, just to be clear, for
refinancing of the debt incurred in this deal, and you did
not need to raise any debt to complete this deal, is that
correct?
JM. Messier That is correct. Gullaume is speaking now.
M We might use a bridge loan if there is some time different.
L. Sarkus But it is not subject to financing, is what I'm asking.
M It's not subject to financing, and what we want to cover is
not the market cap of HM, it's the market value including HM
average debt.
L. Sarkus My next question, to clarify, is for Nadar. Could you go over
the background again, you indicated that Vivendi obviously,
and I agree, is the most attractive party. But what sort of
process was undertaken by the company and by the board, and
were alternatives to maximize shareholder value examined?
N. Darehshori When our first discussion took place on November 29th, even
though we discussed basically the universe of educational
publishing and publishing in America and abroad, and learned
about Vivendi's interest in growing in education, in the
publishing market, I took that to the board and they said,
"It sounds interesting," and they gave me authorization to
continue to have conversations to see what are the synergies,
what are the benefits that we could realize for our employees
or authors, our community and to our shareholders. So we had
a number of other meetings and then eventually our board of
directors put together a committee to study various
possibilities, and the committee, after having some
discussions within the management team and also with
investment bankers and lawyers and advisers, decided that
this makes the most sense, because it not only provides those
advantages that I mentioned, globalization, digitization,
more vitality to the company and giving it the ability to
grow and grow faster and to take advantage of some of the
synergies that this will bring in.
We also considered all of our stakeholders and how this will
benefit every stakeholder we have. Our authors will continue
to work with us to develop outstanding products. Our editors
and our salespeople will have
opportunities to continue to promote those publications. Our
community will be enriched within the passion for publishing
and for quality publishing, and management's commitment to
quality and being able to stay in Boston, and then, finally,
attractiveness to our stockholders.
L. Sarkus Did they look at a full range of options to this transaction?
Did the special committee look at a full range of options?
N. Darehshori Every possibility was considered, every possibility. You
know, most of us in this business spent all of our lives, I
have spent 35 years of my life in publishing. We know all the
players. Even though we know them very well, we did a great
deal of soul-searching and we found no other partner any
place in the world that has all of these qualities that I
mentioned within Vivendi Universal.
L. Sarkus And who were the investment bankers advising the special
committee?
N. Darehshori The investment bankers were on our side, JP Morgan and two
law firms, Scaddinart and Pat Bolder in our side. And their's
was Lazard and Cravath Scadden Aps
L. Sarkus Thank you very much.
Coordinator Our final question today comes from Dennis Semilink. Sir,
your line is open, please state your company name.
D. Semilink I'm calling from Delta Securities in Netherlands. I have a
question, you were saying that some 70-75% of asset sales
would generate the necessary amount for the acquisition.
Could you give us a feeling of what other parts you would
generate for the necessary cash flow?
JM. Messier We have not made the final decision there, so I'm not going
to mention. What I can tell you is that we've reviewed all of
the different options, which we believe are going to come to
100% coverage of the full enterprise value by asset sales
within our VUP portfolio, and I think that is very clear.
What we did make public is already covering three-fourths of
it. We will cover 100% of it by some, let's call them small
size supplementary arbitrage.
If I can just end this call by obviously thanking you for
joining us and by telling you that this acquisition not only
will strengthen our education business, that's fully in line
with the fact that in those entertainment fields,
unique to be both global and local, to benefit from global
leverage, but being local and multi-language content
providers, that's what we are going to be in the education
business, and to be committed on all support not one specific
or not several specific, but every single support that you
need to access to the customer. From those points of view,
this acquisition is fully fitting with the core of the
strategy of Vivendi Universal, to without disturbing
anywhere, our financial strength and adding additional EBITDA
and cash flow contribution to the group. That's why we think
that this is a great contribution to Vivendi Universal's
strategy.
So, thank you very much for your attention and being part of
this call. Thank you, goodbye.