Chapter ends on Reader’s Digest LBO

The book has closed on Ripplewood Holdings’ investment in the 87-year-old publisher of the Reader’s Digest, adding yet another unhappy chapter to this year’s collection of LBO failures.

Burdened with debt from its buyout less than three years ago, The Reader’s Digest Association Inc., a publisher of 94 magazines and operator of 65 branded websites, filed for Chapter 11 bankruptcy protection in late August.

The move was part of a prearranged restructuring plan with the company’s lenders to cut Reader’s Digest’s debt load 75% from $2.2 billion to $550 million. The company says that more than 80% of its secured lenders signed off on the agreement, which effectively wipes out Ripplewood Holdings’ equity stake in the company.

New York-based Ripplewood Holdings led a consortium that took Pleasantville, N.Y.-based Reader’s Digest private late in 2006, a time when the leveraged buyout community was in a frenzy for media properties and firms were investing in what they saw as category killers, such as the hip hop monthly Vibe, which was acquired by The Wicks Group of Cos., and business magazine Forbes, which sold a significant piece of itself to Elevation Partners.

The deal for Reader’s Digest was worth about $2.4 billion, including the assumption of about $800 million in debt. Other investors in the transaction included GoldenTree Asset Management, GSO Capital Partners (which was subsequently acquired by The Blackstone Group), J. Rothschild Group, Magnetar Capital and Merrill Lynch Capital Corp.

With more than 60 U.S. sponsor-backed companies having fallen into bankruptcy so far in 2009, Reader’s Digest is not the only media-related company to have faltered in the downturn. The sector is seeing both cyclical and secular changes as advertisers cautiously pick their spots and circulation dwindles as the Internet and mobile devices steal attention from print sources.

In April, Yucaipa Cos. lost its equity stake in Source Interlink Cos. when the publisher of such magazines as Motor Trend and Soap Opera Digest filed a pre-packaged Chapter 11 bankruptcy protection plan to relieve itself of roughly two-thirds of its $1.5 billion debt load. In January, Avista Capital Partners’ majority stake in newspaper The Star Tribune of Minneapolis was also wiped out following the company’s bankruptcy filing.

Ripplewood Holdings was no stranger to the media and publishing sectors. Prior to its investment in Reader’s Digest, the firm had already acquired stakes in Direct Holdings Worldwide, the global direct marketer affiliated with the Time Life, and WRC Media, a publisher of educational materials.

Through its restructuring, ownership of Reader’s Digest has been transferred to a steering committee led by JPMorgan Chase & Co. The committee also includes Ares Management, Eaton Vance, Regiment Capital and GE Capital, among others. —Ari Nathanson