Chapter 11 is next step for Reader’s Digest

By Andrew Vanacore
Associated Press / August 18, 2009

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NEW YORK - The publisher of Reader’s Digest, the country’s most popular general interest magazine, said yesterday it will file for Chapter 11 protection with a plan to swap a portion of its debt for ownership of the company.

Reader’s Digest Association, which also markets books and publishes dozens of other magazines and websites, said it has reached an agreement in principle with a majority of lenders to erase a portion of $1.6 billion in senior secured notes. The lenders will get ownership in return.

Already, this year’s advertising declines have prompted the closing of several high-profile magazines, including Conde Nast’s Portfolio, Domino, and Blender.

Reader’s Digest chief executive Mary Berner insisted, though, that the company’s US magazines remain strong, with the number of ad pages down less than 6 percent through the September editions.

She said Reader’s Digest titles rely less on luxury brands and high-income tastes, giving them an added appeal in a recession that has clobbered much of the print media industry.

“Our brands are home and heartland. Our brands have a very, very Midwestern sensibility - a back-to-basics sensibility,’’ she said in an interview. “Reader’s Digest has actually done quite well.’’

She said some additions for the company, including the magazine Everyday with Rachael Ray and cooking site, have succeeded as well.

Berner blamed two underperforming properties the company agreed to sell off last year: Books Are Fun Ltd., a company that sells books at events and book fairs, and QSP, which assists with fund-raising for schools and youth groups.

Even so, Reader’s Digest, the iconic monthly magazine founded in 1922 as a collection of condensed articles from other publications, has been searching for a new niche as the Internet upends the magazine industry’s traditional business models.

In June, the magazine announced it would cut the circulation guarantee it makes to advertisers to 5.5 million from 8 million, and lower its frequency to 10 issues a year from 12.

In the second half of last year, the US edition of Reader’s Digest had circulation of 8.2 million, down from a peak of roughly 17 million in the 1970s.

The planned bankruptcy filing, which does not include operations outside the United States, marks the latest stage in a long evolution for the company.

Reader’s Digest went public in 1990 and was initially 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 Holdings LLC, a New York private equity firm, led a consortium of investors in a $1.6 billion buyout that took the company private in 2007. Those investors include GoldenTree Asset Management, GSO Capital Partners, Merrill Lynch Capital Corp., J. Rothschild Group, and Magnetar Capital.

In a statement yesterday, Berner said the decision to file for Chapter 11 follows “months of intensive strategic review of our balance-sheet issues.’’

The company said it will skip a $27 million interest payment on its 9 percent notes due in 2017 while it looks to build support among lenders for its restructuring plans.

The agreement includes $150 million in “debtor-in-possession’’ loans to finance the company during bankruptcy protection. Overall, the company plans to shrink its debt from $2.2 billion to $550 million following Chapter 11. It said the “vast majority’’ of suppliers will be paid in full under the bankruptcy plan.

The company said it will seek further agreements from lenders and other stakeholders before making a formal bankruptcy filing within a month. Its largest debt holders, led by J.P. Morgan Chase, include GE Capital, Aries Management, DK Partners, Regiment Capital, and Merrill Lynch.

The company expects to emerge from bankruptcy protection 45 to 90 days after the filing.

Aside from Berner, all of the company’s board members who have served since Ripplewood’s $1.6 billion acquisition of the company in 2007 have resigned.