Amid Media Frenzy, Ripplewood Snags Reader’s Digest

Target: The Reader’s Digest Association Inc.

Purchase Price: $2.4B ($17 per share, plus assumption of debt)

Sponsors: Ripplewood Holdings, GoldenTree Asset Management, GSO Capital Partners, J. Rothschild Group, Magnetar Capital and Merrill Lynch Capital Corp.

Seller: Shareholders

Financial Advisors: Seller: Goldman, Sachs & Co., Michael R. Lynch; Sponsors: Morgan Stanley & Co. Inc., J.P. Morgan Securities Inc., Citigroup and Merrill Lynch

Legal Counsel: Seller: Jones Day, Richards Layton & Finger P.A.; Sponsors: Cravath, Swaine & Moore LLP

Looking at some of the deals that have come through the hopper this year, one could easily characterize 2006 as the year buyout firms fell in love with the media. Indeed, transaction sizes in the sector speak for themselves. The three largest media plays of the year—the agreed-to acquisitions of Clear Channel Communications Inc. and Univision Communications Inc. and the completed VNU NV buyout—have a combined enterprise value of approximately $50.1 billion.

And it’s not just the broadcasters and global information providers that are attracting all the attention. The consumer magazine front, too, has seen a substantial amount of attention this year, despite the fact that ad sales and subscription rates have been dwindling as consumers spend more time and money on cable TV and the Internet. Buyout firms have been going for jugular, investing in category killers such as the hip hop monthly Vibe,acquired by The Wicks Group of Companies, and the business fortnightly Forbes, which sold a significant piece of itself to Elevation Partners.

Continuing the trend, earlier this month New York buyout firm Ripplewood Holdings LLC led a group of investors in a deal to acquire The Reader’s Digest Association Inc. for $2.4 billion, including the assumption of about $800 million in debt. Per-share, that breaks down to $17 per share for the NYSE-traded company, a 9.6% premium to its trading price the day before the transaction was announced and a 25% premium to its prior-60-day trading average.

Ripplewood is an old hand in the media sector, having previously invested in Direct Holdings Worldwide, the global direct marketer using the Time Life brand, and WRC Media, a publisher of educational materials. Other equity investors in the deal include GoldenTree Asset Management, GSO Capital Partners, J. Rothschild Group, Magnetar Capital and Merrill Lynch Capital Corp.

The Reader’s Digest is the world’s largest monthly magazine, with a monthly circulation of approximately 18 million and a global readership of approximately 80 million. The U.S. edition of the magazine covers more than half of that, with a rate base of 11 million copies that reach about 43 million readers, according to the publication’s Web site. Other magazines in the Reader’s Digest Association’s portfolio include special interest publications such as the food magazine Taste of Home and the do-it-yourself title The Family Handyman. In all, the company generated revenue of $2.4 billion for its fiscal year ended June 30, 2006.

JPMorgan Analyst Barton Crockett wrote in a research note that the buyout carries a purchase price multiple of 11.2x Reader’s Digest’s estimated 2007 EBITDA.

Since 2000, the consumer magazine industry has been coping with a marked migration of readers from the printed word to other media, which has caused a shift in advertising spending, according to the latest Communications Industry Forecast released by Veronis Suhler Stevenson, a New York private equity and mezzanine capital investment firm. During the first four months of 2006, print magazine advertising spending in the 12 largest ad categories decelerated, growing only 5.2% compared to 7.7% in the same period last year, the report says. Some magazine publishers are fighting fire with fire, focusing more on the Internet as a way to reach readers and grab back lost ad dollars.

In the case of the well-established Readers’ Digest, the buying group plans to look more to conventional methods to grow the business. It reportedly hopes to cross-market the publication to customers who already subscribe to Ripplewood-owned publications Weekly Reader and World Almanac.

In a prepared statement announcing the deal, Ripplewood CEO Timothy Collins, said, “Together with our portfolio companies, Direct Holdings and WRC Media, Reader’s Digest will enjoy the benefits of a diversified, multi-channel publishing platform.” Ripplewood Holdings could not be reached for comment by press time.—A.N.