Reader's Digest Bankruptcy Underscores Its Need to Remake Media Model

Berner: Company Will Be 'Channel-Agnostic' After Chapter 11 Ends

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NEW YORK ( -- There are a few ways to look at the news that lenders are taking ownership of Reader's Digest Association away from private equity through a prearranged Chapter 11 filing:

  • That the company that fetched $2.4 billion in its leveraged buyout just two-and-a-half years ago will soon be worth a fraction of that, perhaps as little as less than $1 billion.
  • That private equity once again overextended itself, borrowing more than it could afford to pay back once a little adversity and a lot of recession descended.
  • That the company has more or less pressed the reset button, dramatically slashing its interest payments while getting new owners who are probably willing to wait another few years for an exit.
  • All these interpretations are probably true.

    "Like many other companies, we find ourselves with too much debt to service during this recession," said Mary Berner, who retains her CEO post and board seat despite arriving with Ripplewood Holdings, the private-equity firm now being swept off the table. For what it's worth, her involvement has outlasted that of her younger brother, Robert L. Berner III, who was managing director at Ripplewood when it named her CEO of Reader's Digest Association. He left Ripplewood the month the Reader's Digest deal closed to become a partner at CVC Capital Partners.

    Mary Berner, CEO, Reader's Digest
    Mary Berner, CEO, Reader's Digest
    Debt is definitely the crux of the problem that dashed Ripplewood and its fellow investors' hopes for the deal. Ripplewood had apparently good reasons for optimism back in March 2007, including the prospect of combining the huge database of perhaps 100 million names at Reader's Digest Association with its own portfolio company, Direct Holdings Worldwide, the global direct marketer using the Time Life brand.

    Crippling debt
    But Ripplewood also took on so much debt that the company owed some $145 million in annual interest payments alone. Direct Holdings Worldwide and other operations, moreover, underperformed, leading to some divestments and shutdowns. So by the thick of the recession, the company's cash flow was running around $130 million.

    Once it emerges from Chapter 11, which it will officially enter by the middle of September, annual debt service will run closer to $80 million a year.

    "This is a relatively simple financial tool we're using," Ms. Berner said last week, two days after the company revealed its new plan. "It's not what people think about when they typically think about Chapter 11."

    Of course, no one wants to hear the word "bankruptcy," as Ms. Berner acknowledged to staff in a speech the morning of the big news. "In the U.S., you might think of long court fights, major layoffs, selling core assets, cutting costs to the bone, or it can also mean that a company's operations are not strong," she said. "So before anyone freaks out, I want to say as loudly as I can that is not -- I repeat, not -- the kind of Chapter 11 we are filing, and none of that bad stuff is going to happen here."

    Ms. Berner said the company itself is outperforming many of its peers in the media business. Revenue for the 12 months that ended in June declined only 1.4% from the year before. The U.S. edition of the flagship magazine -- where Ms. Berner has already cut circulation and frequency, and opened up the back cover to ads for the first time -- saw ad pages fall 8% in the first half of the year compared with the first half of 2008. But monthlies as a whole lost 28%, according to Media Industry Newsletter.

    'Any platform'
    The recession also may be starting to bottom out, Ms. Berner said, which would make it easier for the company to concentrate on the simultaneously changing media business. "The way we're looking at that is: We are channel-agnostic, and we have organized the company that way," she said. "We look at Reader's Digest, not Reader's Digest the magazine, including digital, single-issue, single-topic magazines -- anything that a customer will want in any platform. Unless media companies get organized that way, you're doomed to fail."

    That last point may sound odd to competing publishers that haven't had to file for Chapter 11 bankruptcy protection. But most should probably concentrate on their long-term prospects as the ground continues to shift. Print isn't dying, but its shape, sway and profitability are changing.

    "The idea of a general-interest magazine thriving into the future at the circulation levels we're seeing now is simply absurd, because customers want information and entertainment and service from different platforms and channels," Ms. Berner said.

    Reader's Digest Association still won't belong to any long-term owners after the Chapter 11 process concludes. Instead the new owners, a group of lenders led by JPMorgan Chase, likely will seek to take the company public again or sell it within the next few years.

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