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Published: Monday, 8/24/2009

Reader s Digest files Ch. 11 bankruptcy protection

ASSOCIATED PRESS

Reader s Digest Association Inc., publisher of the iconic general interest magazine that began gracing American homes in 1922, filed for Chapter 11 bankruptcy protection Monday as it faces falling print circulation in the Internet age and looming debt payments.

Known for its heartwarming stories about American life as other publications moved toward edgier fare, the company s flagship Reader s Digest magazine has seen its U.S. circulation drop from a peak of more than 17 million in the 1970s to just above 8 million last year.

Magnifying the publishing world s woes is an advertising slump that already has led to the closing of several high-profile magazines, including Conde Nast s Portfolio, Domino and Blender.

But Reader s Digest CEO Mary Berner has said that ad pages for the company s U.S. magazines are down less than 6 percent through the September editions. The publications down-home feel instead of a high reliance on luxury and high-income tastes has an added attraction to advertisers in a recession that has hurt much of print media.

She noted that the company had several successful ventures, such as the magazine Everyday with Rachael Ray and cooking site AllRecipes.com. Berner, however, cited problems with two underperforming properties the company agreed to sell last year: Books Are Fun Ltd., a company that sells books at events and book fairs, and QSP, which assists with fundraising for schools and youth groups.

Still, weakness in ads, lower circulation and a mountain of debt created a perfect storm that led to the prearranged bankruptcy filing of the privately held company.

The filing had been expected after the company said last week it had reached an agreement with a majority of lenders.

Reader s Digest said the prearranged bankruptcy filing, which only affects U.S. operations, would give lenders a 92.5 percent ownership stake in exchange for lowering its indebtedness to $550 million from $2.2 billion. The filing has gotten the approval of more than 80 percent of the company s senior secured lenders, critical for a quicker exit from bankruptcy protection.

The publisher expects to emerge from bankruptcy protection 45 to 90 days after the filing, which was made at the U.S. Bankruptcy Court in New York.

The company piled on debt following a $1.6 billion leveraged buyout in 2007 by investors led by Ripplewood Holdings LLC, a New York private equity firm, to take Reader s Digest private. In such a transaction, investors typically borrow heavily to acquire a company, betting that operations would generate enough cash to cover the debt payments.

But signs of trouble have since emerged. In June, Reader s Digest magazine cut its circulation guarantee to advertisers to 5.5 million from 8 million, and lowered its frequency to 10 issues a year from 12.

Reader s Digest went public in 1990 and was controlled by a charitable foundation set up by the company s founders, DeWitt and Lila Wallace. The company bought out the foundation s shares in 2002. Ripplewood and other investors stepped in five years later.

In the Chapter 11 filing, the company s senior secured lenders have committed $150 million in new debtor-in-possession financing that can be converted into exit financing once Reader s Digest leaves bankruptcy protection.

The publisher said the financing should give it ample liquidity for its restructuring.

Its international operations are expected to run on existing funds from continuing operations and proceeds from the debtor-in-possession financing. The company said most of its suppliers will be paid in full under the bankruptcy plan.

All of the company s board members who have served since Ripplewood s acquisition have resigned, aside from Berner. Two members who recently joined will continue to serve.

Pleasantville, N.Y.-based Reader s Digest publishes 94 magazines and sells about 40 million books, music and video products each year.



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