Nov. 29 (Bloomberg) -- Houghton Mifflin Co., publisher of the ``Curious George'' children's books and the American Heritage Dictionary, will be sold for about $3.4 billion to a company controlled by former Credit Suisse Group banker Barry O'Callaghan, said two people with direct knowledge of the matter.

The Boston-based publisher will be combined with O'Callaghan's Riverdeep Holdings Plc, an Irish maker of educational software, in a new company that will be based in Dublin, said the people, who requested anonymity because the sale hasn't been announced. The total amount includes debt.

``There is a lot of work to be done at Houghton Mifflin to improve margins,'' said Conor O'Shea, a media analyst at London- based Teather & Greenwood. ``Riverdeep's strength is in educational software, which is the part of the industry that is driving the market.''

The purchase of Houghton Mifflin gives Riverdeep the fourth-largest U.S. educational publisher, with annual revenue of more than $1 billion. A group of private-equity firms bought the company from Vivendi SA for $1.68 billion in December 2002. Bain Capital LLC and Thomas H. Lee Partners LP have 40 percent stakes, and Blackstone Group LP has 20 percent.

O'Callaghan led a 2003 management buyout of River Deep U.K. by investors including private-equity firm Alchemy Partners. He is the 36th richest man in Ireland, with a fortune of 271 million euros ($357 million), according to the annual Sunday Times Rich List.

Financing

Credit Suisse, Citigroup Inc. and Goldman Sachs Group Inc. are arranging the financing of the takeover, a person familiar with the matter said. Houghton Mifflin had total debt of $1.7 billion and Riverdeep's was $565 million as of June 30, according to an Oct. 23 report by Standard & Poor's.

O'Callaghan didn't return a call seeking comment. Bain managing director Steve Pagliuca, Thomas H. Lee co-president Scott Sperling and Blackstone president Tony James didn't return calls left on their office voice mails in the U.S. today. Goldman spokesman Simon Eaton declined to comment, as did Credit Suisse spokesman Jack Grone and Citigroup's Jeffrey French.

The New York Times reported the sale today.

Riverdeep may sell shares two to three years after a purchase of Houghton Mifflin, the Irish Times reported Oct. 25.

Direct Sales

Standard & Poor's has its B rating on Houghton Mifflin under review for a possible cut, citing the possible combination with Riverdeep. The current rating is five steps below investment grade.

``There might be some benefit from replicating the success of Riverdeep's direct school sales and product management across the combined organization,'' S&P said last month.

Houghton Mifflin's competitors include McGraw-Hill Cos., Pearson Plc and Reed Elsevier Plc's Harcourt unit.

Houghton Mifflin traces its roots back to 1832 when William Ticknor purchased the Old Corner Bookstore in Boston with partner James Fields, according to the company's Web site. Ticknor and Fields established relationships with U.S. authors Ralph Waldo Emerson and Mark Twain and formed a close association with printing company Riverside Press founded by Henry Houghton in 1852.

Houghton Mifflin now mainly publishes textbooks and educational materials. Anthony Lucki, former president of Harcourt Inc., a publisher of secondary school books owned by Reed Elsevier Plc, became Houghton Mifflin's Chief Executive Officer in 2003.

To contact the reporter on this story: Brett Cole in New York at coleb@bloomberg.net

Last Updated: November 29, 2006 07:19 EST