Mergers & Acquisitions

'Significant' Shareholder Objects to Houghton Mifflin Harcourt Sale Deal with Veritas Capital

Breach Inlet Capital Says It Will Not Tender Its Shares Amid Flurry of Law Firms’ Interest, Moody’s Review for Downgrade

• By Kristal Kuykendall
• 02/23/22

A day after K–12 curriculum provider Houghton Mifflin Harcourt Co. announced it is being acquired by private investment firm Veritas Capital in a deal valued at $2.8 billion, one of HMH’s “significant” shareholders objected to the sale in a letter to the board of directors, saying it “will not be tendering its shares into Veritas’ offer.”

Based in Boston, HMH is one of the three largest providers of K–12 education and professional development content, according to Moody’s Investors Service. The acquisition agreement released on Tuesday calls for HMH shareholders to receive $21 in cash per share, representing a 36% premium to the company's share price as of January 13, 2022.

HMH executives said in a recent earnings and guidance call that it expected to top $1 billion in total billings in 2021, which should translate to a higher valuation per share than the offer by Veritas Capital, wrote Breach Inlet Capital in a letter sent today to the HMH board and shared publicly online. HMH did not respond to a request for comment by THE Journal on Wednesday.

Breach Inlet Capital’s letter opened by noting that its ownership interest exceeds “that of all independent members of the Board of Directors combined,” and it praised HMH management’s efforts toward the company’s digital transformation.

“We are extremely disappointed in the board’s decision to sign a definitive merger agreement allowing Veritas Capital to acquire HMH for a paltry $21/share,” the letter stated. “We do not believe Veritas’ offer fully reflects the fair value of the company. Accordingly, we will NOT be tendering our shares into Veritas’ offer to acquire HMH for $21/share.”

The letter detailed Breach Inlet Capital’s five primary reasons for objecting to the terms of the sale:

• “The potential value to be unlocked by HMH’s transformation and the secular shift to digital learning weighs against a premature sale of the company.”
• “Conservative estimates and a below-market multiple objectively demonstrate that HMH is undervalued at $21/share.”
• “Veritas’ offer is inferior to McGraw Hill’s acquisition multiple, yet HMH is a superior company.”
• HMH’s “valuation premium may be further enhanced as the market begins to view the Company as a subscription-based business.”
• “The timing of HMH’s sale is perplexing, given forthcoming 2022 guidance and a seemingly incomplete sale process.”

“We find it disturbingly convenient for Veritas to sign a merger agreement just prior to HMH earnings report, especially given HMH’s fundamental momentum,” the letter said. “The 4Q21 earnings report was due on February 24, 2022. As part of that report, HMH was likely to provide guidance for 2022. Given CEO Lynch’s optimism about business fundamentals, we believe the release of 2022 guidance would have forced Veritas to pay more than $2.8b for the company.”

The letter, signed by Breach Inlet Capital Founder and Portfolio Manager Chris Colvin, pins its objections on comparable valuations of HMH competitors as well as recent earnings and outlook statements by HMH executives, concluding with: “We think selling HMH for $21/share is an egregious decision and we will NOT be tendering our shares into the offer.”

The agreement to sell comes about a year after HMH sold its consumer book publishing division to HarperCollins Publishers parent News Corp. for $349 million.

Since Tuesday’s news of the acquisition deal, several law firms announced intentions to "investigate possible breaches of fiduciary duty and other violations of law by the board of directors of HMH, in connection with the proposed acquisition by Veritas Capital via a tender offer.”

Investor rights attorneys at four firms — WeissLaw, Ademi, Bragar Eagel & Squire, and Halper Sadeh — said in news releases Tuesday and today that they have launched investigations into the bidding and sale process and the agreed-upon tender offer.

“The merger agreement unreasonably limits competing bids for HMH by prohibiting solicitation of further bids, and imposing a significant penalty if HMH accepts a superior bid,” alleged Ademi in its news release. “HMH insiders will receive substantial benefits as part of change of control arrangements.”

Bragar Eagel & Squire said in its inquiry announcement that it “is concerned that HMH’s board of directors oversaw an unfair process and ultimately agreed to an inadequate merger agreement. Accordingly, the firm is investigating all relevant aspects of the deal and is committed to securing the best result possible for HMH’s stockholders.”

Also on Tuesday following the acquisition announcement, Moody’s placed HMH credit ratings on review for downgrade, revising its outlook from “stable.”

Executives at HMH — which serves more than 50 million students and 4 million educators in 150 countries — said Tuesday that the acquisition will allow the company to grow its product offerings and reach more students and educators globally.

The decision to sell to Veritas followed a strategic review by HMH's Board of Directors that included discussions with several potential bidders, according to the news release announcing the acquisition agreement.

“Partnering with Veritas will provide HMH with the opportunity to accelerate our momentum and increase our impact. … The time is right to move into the next phase of our long-term growth strategy alongside a partner that brings significant industry expertise,” said HMH President and CEO Jack Lynch, who will continue to lead the company along with the current management team, the news release said. “As the promise of digital learning increasingly takes hold across the nation, we are confident this transaction will deepen our ability to bring the power of learning to even more teachers and their students, invest in our purpose-driven team, and have a positive impact on the communities we serve.”

The deal was unanimously approved by HMH's Board of Directors, the company said, and it is expected to be completed by July 1, 2022, “subject to receipt of requisite regulatory approvals and satisfaction of customary closing conditions,” HMH said. More information about the transaction and tender offer are included in the Schedule 14D-9 filing.

HMH is scheduled to release fourth-quarter and full-year 2021 results before the market opens on Thursday, Feb. 24, 2022. The scheduled earnings and guidance conference call has been canceled, HMH said.

For more information, visit the HMH website.