“I’ll publish my book with Amazon as long as I can retain the print rights.”

“Original e-book publication is fine, but I don’t consider my book legitimate unless it’s printed on paper and sold in bookstores.”

“I don’t care if Amazon pays 70% royalty, I’m not interested in straight royalty, no advance deals.”

Those are typical explanations given by authors reluctant to see their books released as Amazon originals.  But thanks to a shrewd partnership between Amazon and Houghton Harcourt, a traditional print publisher, authors and their agents may no longer have reason to say no when Amazon offers a contract.  According to Publishers Lunch, Houghton Harcourt will distribute selected Amazon titles in bookstores.

This arrangement could be win-win-win for Amazon, Houghton and of course for authors. By teaming up with Amazon Houghton gets titles that have been pre-selected, pre-edited, pre-formatted and pre-promoted. They just have to add water to make money.  And does Houghton ever need money. For years its parent company has flirted with ruin thanks to ill-conceived fiscal maneuvers that left it up to the chin in debt.  (See Parent Company Leveraged up the Giggy)

Amazon benefits from having a big foot inside bookstores. And it can now bid for properties against conventional publishers like Simon & Schuster, Penguin and Macmillan because the bookstore playing field is now level.

And of course authors benefit from having their e-book cake and print cake and eating both.

We don’t know the details, but speculation is that Amazon would license the print rights to Houghton the same way a traditional publisher would license book club or paperback reprint rights to a third party.  Houghton would underwrite or at least contribute toward the advance.

One concern is how comprehensive Houghton’s acquisitions will be. If they pick and choose, as the report seems to confirm, authors and agents could hold out for guaranteed print publication.

Says book industry consultant Mike Shatzkin:

“From one standpoint, this makes a lot of sense. Amazon can sell the hell out of a book online, and they have long made print available through their CreateSpace program. But they can’t merchandise books in stores. Even paying extremely high print and ebook royalties, as they do, they can’t maximize an author’s revenues if they can’t deliver store sales of print in today’s world.”

What’s that you say? Does this mean that Amazon is now going into competition with its own suppliers, bidding against the very houses that supply Amazon with books?  Short answer is yes.  But that should come as no surprise, as Amazon has never been shy about competing with publishers. The chance to get its titles into bookstores may simply be too tempting to let a little thing like scruples get in the way.

Read It’s official: putting books in stores is a subsidiary right

Richard Curtis

“It’s only when the tide goes out that you learn who’s been swimming naked.” We’ve heard that phrase often lately in connection with fast-and-loose high-rollers whose overinflated positions have been exposed by the recession. Our candidate for Naked Swimmer of the Year is Barry O’Callaghan , CEO of the parent company of Houghton Mifflin Harcourt that is instituting a “restructuring” that may wipe out a lot of investors and the bank that backed them.

Michael Cader has written a poker-faced review of O’Callaghan’s breathtaking excuses and finger-pointing, blaming everyone and everything but Canada. He does however blame California!

Read Cader’s step by step summary of how O’Callaghan brought his company to the verge of ruin: More From Barry “Don’t Blame Me” O’Callaghan.

RC

Last March Houghton Mifflin’s parent company, staggering under a $7 billion debt load resulting from an ill-timed leveraged acquisition, put the trade book publisher up for sale (see Psst…Wanna Buy a Publisher Cheap?), but subsequently decided to see if it could restructure its finances. It seemed like a good idea in view of an annual debt service of $500 million.

Now, Michael Cader reports in Publishers Lunch that EMPG, Houghton’s owner, is going to try another restructuring “that would wipe out equity-holders entirely and turn the company over to its secured lenders.” Where we come from that’s what we call bankruptcy.

And yet, Cader notes, this calamity “could in a perverse way be the best thing for the company, which appears stable as an ongoing operation absent the unrealistic level of debt taken on to build the conglomerate in the first place.” The Italics are mine: to put it another way, EMPG and Houghton are sound operations except for a gambling debt so colossal that it will wipe out those foolish enough to have bought into it and threaten to ruin the bank that funded this misadventure. “These developments have no adverse effect on our day-to-day operations, on our employees, or on the nature and quality of the service we provide to our customers and business partners,” an EMPG statement says. I thought that one was worth italicizing too. It might have been spoken by the wine steward on the Titanic.

A Viennese general whose troops were surrounded is said to have reported to his commanding officer that his situation was “desperate but not serious.” Thus does Houghton bravely carry on even as its owner lets loose the wrecking ball.

Richard Curtis

Jim Milliot & Judith Rosen of Publishers Weekly report that Houghton Mifflin Harcourt’s trade book division – the one that stopped acquiring last fall – is being auctioned off as we speak by its debt-plagued parent company. Their sources say there are four “serious” bidders and the action is at $200 million so far. Given the 7 billion debt load that Education Media & Publishing Group groaning under – costing them $500 million annually in debt service alone – bidders will have to get thirty or forty times more serious if the winning bid is to make EMPG even remotely whole.

Leading the pack of snapping bargain hunters, as we predicted here, is Hachette, but there is also apparently a dark horse in the person of “former HM executive Wendy Strothman who has the backing of private equity firm.”

Vultures are standing by.

RC

Richard Perez-Peña of the New York Times reports that the Tribune Company, the mighty media giant that boasts among its holdings The Chicago Tribune and The Los Angeles Tribune, has filed for bankruptcy protection. Owner Samuel Zell had assumed $13 billion in debt to finance his acquisition of the chain, but put up just $315 million of his own money to gain control. Then the gods started tearing his wings off.

Zell describes it as “a perfect storm.” Perez-Peña explains it this way:

“The recession and the shift of advertising to the Internet have hit newspapers with the sharpest drop in advertising revenue since the Depression — Tribune’s papers were down 19 percent in the third quarter — and some major newspapers have defaulted on debt or been put up for sale, with no takers. But Tribune’s problems were made significantly worse by the unusual $8.2 billion deal put together last year by Mr. Zell, which took the company private and nearly tripled its debt load, driving the company deeper into debt than any other major newspaper publisher.”

When Zell saw $900 million in interest due in the next year, plus more than half a billion dollar principal due in June, he realized it was time to throw in the towel.

“The unusually heavy debt burden means Tribune’s bankruptcy is not a harbinger for the newspaper industry,” the Times quoted one media analyst. “[Zell] took on a huge amount of debt at just the wrong time.”

This is just the latest story in a few weeks of a highly leveraged billion dollar media operation in trouble (I haven’t even mentioned speculation about Sumner Redstone’s Viacom, owner of Paramount Pictures and Simon & Schuster.) So, I’m sorry, everybody, but I do take this as a harbinger. In fact, the daily business news has harbingers coming out the giggy, and one of the things they harbinge is more overweening tycoons steering corporate supertankers onto lee shores, blowing billions of dollars through ghastly misjudgments and tragically damaging innocent people. (Read all about the screwing of the Tribune Company’s employees in Perez-Pena’s article.)

Most major American publishing companies are components of immense and highly complex corporate enterprises, and though we like to think that the parent companies are not as terrifingly leveraged as Houghton Mifflin Harcourt or The Tribune Company, who can say for sure that it can’t happen here? Where you work.

RC

Motoko Rich in the New York Times reports that Education Media and Publishing Group, the Irish owner of Houghton Mifflin Harcourt, “borrowed heavily to finance the acquisitions of Houghton Mifflin in 2006 and, last year, Harcourt.” How much, exactly? Jeremy Dickens, the private-equity company’s president who this week announced a temporary halt of acquisitions, put it at “about $7 billion in debt outstanding, on which it was paying about $500 million in debt service annually,” says Rich, who makes it clear that the purchase freeze was directed at the company’s consumer book business, not the textbooks. The former comprises less than 6 percent of total revenues.

Yesterday we speculated on the possibility the company or some part of it might have to be sold to relieve debt pressure. Dickens denied it – sort of. “If there’s a transaction that makes sense for all of our stakeholders, we’ll consider it,” he stated, admitting that some trade publishers had been sounding the company out.

We thought one of them could be Hachette. Interestingly, Hachette and Houghton Mifflin Harcourt were paired in Rich’s article for another reason. Contrasting the bleak news from HMH, Hachette announced a holiday bonus for all its employees amounting to one week’s salary.

RC

After I ran an item yesterday about the acquisition freeze at Houghton Mifflin Harcourt, in which Publishers Weekly used the term “leveraged”, a related news item was brought to my attention. At a panel panel conducted at last October’s Frankfurt Book Fair, Lagardere Publishing’s Arnaud Nourry observed, “within the last two or three years some major publishing companies, particularly in education, have been acquired by highly-leveraged private equity funds…. I’m sure that within the next months some of these companies will have to sell some of the assets back…”

In light of yesterday’s news, Nourry’s prescience is quite remarkable.

Or is it more than prescience? Nourry, Chairman and CEO of Hachette Book Group, which owns Little, Brown and Grand Central among other holdings, finished the above sentence thus: “…and we’ll be there…to make these acquisitions.” If he, and we, are talking about the same highly leveraged major educational publishing company, he may have been hinting that he’s got his eye on Houghton Mifflin Harcourt.

Is there a white knight in the offing? Watch this page…

Incidentally, Nourry also had this to say on that same panel: “I don’t see the banks pushing Borders into bankruptcy in the short term, and I’m rather confident about the next six or nine months for these big accounts.”

From his lips to God’s ear.

RC

A breaking news story in Publishers Weekly reports that Houghton Mifflin Harcourt announced a temporary suspension of acquisitions, fueling lots of speculation about the health of major publishing companies in the current toxic economic climate.

In its report, PW used the word “leveraged” in describing a possible underlying reason for HMH’s extraordinary action. A news report in WeeklyTelegraph.co.uk may shed some light on the underlying deal that that brought Harcourt into the arms of Houghton:

Publishing giant Reed Elsevier has sold the remaining parts of its Harcourt publishing division to Houghton Mifflin Riverdeep Group, the publishing and software group chaired by Irish entrepreneur Barry O’Callaghan, for $4bn (£1.96bn).

Mr O’Callaghan’s HM Riverdeep Group completed the deal to buy the US-based Harcourt schools education publishing business yesterday evening, after the stock market closed. It is paying $3.7bn in cash and the remainder in shares.

Investment banks Credit Suisse, Lehman Brothers and Citi advised on and financed the deal for HM Riverdeep, which is expected to complete in the first half of 2008.

The acquisition will make HM Riverdeep one of the largest US educational textbook publishers alongside McGraw-Hill and Pearson’s Simon & Schuster.

Mr O’Callaghan’s interest in the remainder of Reed’s educational business comes just months after his Dublin-based company completed a $5bn reverse takeover of Houghton Mifflin, the fourth largest textbook publisher in the US.

That deal was one of the biggest in Irish corporate history, exceeding the $3.9bn (£2.66bn) leveraged buyout of Jefferson Smurfit, the family-controlled paper and packaging company, by Madison Dearborn, the private equity company, in 2002.

Riverdeep originally floated on Nasdaq in 2000 with a value of $140m, but was then taken private in 2003 with a valuation of $400m.

Reed Elsevier bought the Harcourt Education division in July 2001 as part of its acquisition of Harcourt General. The Anglo-Dutch business information, medical and academic publisher put its education arm up for sale in February, after errors and contract losses in its exam-testing business damaged revenues and profits.

In April, Pearson, owner of the Financial Times, agreed a $950m bid for Reed’s assessment and international education assets, continuing a spate of big deals in the educational publishing sector.

Though other major trade publishers have troubles of their own right now, they are of a more conventional kind — possible slowdown of holiday sales, returns, and the like. Alarmed authors and agents can take comfort, however cold, that the HMH situation is not representative or predictive.

RC