UPDATE Aug. 17, 3:52 p.m. With comments from the Reader’s Digest Association chief financial officer, Tom Williams, and on the banks’ involvement.
The Reader’s Digest Association announced on Monday that it would file for Chapter 11 bankruptcy protection for its United States businesses within 30 days.
As part of the reorganization, Ripplewood Holdings, the private equity firm that owned Reader’s Digest and installed Mary Berner as its chief executive, will shed its shares and board seats, and existing debt holders will become the company’s owners. Ms. Berner will continue to run the company, and Tom Williams will remain as chief financial officer. The company does not expect to lay off any employees or close any of its publications, Mr. Williams said in an interview.
The value of the company will be much lower under the overhaul. Its debt of $2.2 billion will be reduced to $550 million, according to the agreement it has already struck with the majority of the banks. Ripplewood had bought Reader’s Digest for $2.8 billion in 2007 in a leveraged buyout.
“The bank lenders are taking a fairly significant haircut,” said John Puchalla, a senior analyst at Moody’s. While it was common for junior creditors to take a loss, for the senior creditors to take such a loss is “notable,” he said. “It’s certainly a lot less than the value the lenders viewed at the time of the L.B.O.,” he said.
Mr. Williams said a majority of its lenders had agreed to the terms of the restructuring, and the company expected to speed through bankruptcy, completing proceedings 45 to 90 days after it files, he said.
The filing does not cover its businesses outside the United States; it sells publications and products in 78 countries.
The company has lined up $150 million from lenders, through a debtor-in-possession loan, to help finance it through the restructuring, and will get $400 million more upon exiting bankruptcy, for the
total new debt
of $550 million.
“Our banks are 100 percent aligned on the vendors that we choose and serve, so there’s no issue associated with paying any vendors,” Mr. Williams said.
That money comes from its new owners: J.P. Morgan, the company’s agent, G.E. Capital, Merrill Lynch, Eaton Vance, Regiment Capital Advisors, Ares Management, and Davidson Kempner. Although Ripplewood made an offer, “the offer from the lender group looks more compelling,” Mr. Williams said.
The company has an additional $100 million in cash on hand, Mr. Williams said.
The overhaul will save Reader’s Digest $65 million a year in cash-interest expense payments, reducing its annual payments from $145 million to $80 million, Mr. Williams said.
The company will continue to operate as usual once it comes out of bankruptcy, but with significantly less debt, Mr. Williams said. “No employees are going to be affected by this, there’s no-to-little
effect on our vendors, our operational performance remains very sound,” he said.
In the company’s most recent fiscal year, ended in June, its revenues, excluding the effects of foreign exchange, declined 1.4 percent, and gross margins and operating profit were flat with last year, Mr. Williams said. Additionally, ad revenue, which makes up about 9 percent of the company’s sales, were down only 3 percent from last year.
The magazine was founded in 1922, summarizing articles published elsewhere, and grew quickly. The company developed other titles, and, in 1990, went public.
The Reader’s Digest Association has been through a turbulent time in the last several years. In 2007, a consortium led by Ripplewood bought the company for $2.8 billion. Ms. Berner, a publishing executive, was installed as chief executive; her brother, Robert Berner, was then a managing director at Ripplewood.
But the company has lost money every year since 2005. The high debt load of the company had led analysts including Mr. Puchalla to downgrade its debt at the beginning of this year. In June, the company announced it was cutting the guaranteed circulation of the flagship magazine to 5.5 million, from 8 million, and decreasing the frequency to 10 times a year, from 12, along with focusing the magazine on socially conservative values.
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