When Ripplewood Holdings took private Reader’s Digest Association Inc. over two years ago for $2.7 billion, the firm believed the magazine publisher had been “misunderstood” in the public markets, and would fare better in private hands, perhaps reversing its declining revenue with selective acquisitions and expansion into more digital formats.
On the content side, new products included the “Purpose Driven Connection” brand featuring Saddleback Church pastor Dr. Rick Warren. On the financial side, the company sold some assets and launched a “recession plan” that included job cuts. But it was not able to ease an untenable debt burden, which eventually sent the company scrambling for restructuring options this March. On Monday, the company said it was headed toward a prepackaged bankruptcy .
Reader’s Digest isn’t the first private equity-backed publisher to suffer amid high debt and dwindling advertising. Earlier this month, Abry Partners-backed Cygnus Business Media Inc. filed for Chapter 11. In July, Maxim magazine publisher Alpha Media Group announced a debt-for-equity swap that resulted in its creditors including Cerberus Capital Management LP taking over control from buyout backer Quadrangle Group LLC. Also, hip-hop magazine Vibe, backed by Wicks Group of Cos., shut down in June (Intermedia Partners later announced a plan to revive the brand, online at first.) Earlier this year, business-to-business publisher Ascend Media, backed by Veronis Suhler Stevenson LLC and CCMP Capital Advisors LLC, was taken over by lenders.
“This is a story that we are going to see over and over again for a number of PE deals in the magazine sector,” says Reed Phillips, a managing director with Desilva & Phillips. “It’s inevitable as a lot of these companies are leveraged at seven to eight times Ebitda.”
For many of these companies, “their earnings just don’t match their capital structure,” says Tom O’ Connor, a managing director with Berkery Noyes & Co. He said the macro-trend of “digital pennies of new media” replacing the dollars of old print media isn’t helping. “They are getting slammed,” said O’Connor.
Reader’s Digest’s leverage had climbed to more than eight times as of March this year from 7.2 times at the time of its buyout. The proposed restructuring is expected to cut its $2.2 billion of debt burden by as much as 75%, or $550 million, in exchange for surrendering ownership of the company to its senior lenders. Reader’s Digest said it’s still in compliance with its financial covenants, and said “business operations remain strong.” The company expects fiscal 2009 revenue declines in the low single digits.
“It was just a case of a business being bought at a wrong time when the leverage was so plentiful,” said Phillips.
In light of its present financial condition, the prepackaged bankruptcy “is making the right move,” which will make it easier for the company to service its debt, according to Phillips. The company’s sales of some non-core assets in the past year will also help.
Overall, Reader’s Digest still has many good assets like “Every Day with Rachael Ray,” but the company is unlikely to attract attention from PE other than from distressed players in the near future.
“It’s hard for PE right now to get the bank debt to make their models work,” said Phillips.