Painful Chapter Ends On Reader’s Digest Buyout

The book has closed on Ripplewood Holdings’s investment in the 87-year-old publisher of the Reader’s Digest, adding yet another unhappy ending 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 Web sites, filed for Chapter 11 bankruptcy protection on August 24.

The move was part of a prearranged restructuring plan with the company’s lenders to cut Reader’s Digest’s debt load by 75 percent to $550 million from its current $2.2 billion. According to the company, more than 80 percent of its secured lenders signed off on the agreement, which effectively wipes out Ripplewood Holdings’s 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 LBO 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, acquired by The Wicks Group of Companies, and business magazine Forbes, which sold a significant piece of itself to Elevation Partners.

The March 2007 deal for Reader’s Digest was worth roughly $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.

JPMorgan Analyst Barton Crockett wrote at the time that the purchase price multiple was estimated at a steep 11.2x Reader’s Digest’s estimated 2007 EBITDA.

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 because of alternatives like the internet and mobile devices stealing attention from print sources.

In April, Yucaipa Cos. lost its equity stake in Source Interlink Cos. when the publisher of magazines such 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’s 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 companies like Direct Holdings Worldwide, the global direct marketer affiliated with the Time Life brand, 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 LLC, Eaton Vance, Regiment Capital and GE Capital, among others.

The day after its filing, Reader’s Digest was granted permission by Judge Robert Drain, who is presiding over the company’s reorganization, to tap into $100 million of its total $150 million debtor-in-possession loan, which it will use to keep operating through its time in bankruptcy.

Reader’s Digest said it does not plan to lay off any employees or sell any units in its restructuring and current management, including President and CEO Mary Berner, remain in place.

In a prepared statement, Berner thanked Ripplewood Holdings for having provided “inspired vision and stewardship over the last two and a half years, including during this [restructuring] process.

In March, Reader’s Digest Association hired law firm Kirkland & Ellis to advise the company on various restructuring options, including a possible bankruptcy.