Investor memory—for better, more often for worse—is forgiving. Thailand and the Philippines were radioactive markets when broader Asia was spreading financial plague in the late 1990s; now both are drawing hot dollars and euros. Housing and junk bonds were crash-bound manias in the Haughty Aughties; one economic calamity later, they’re getting a second chance. Indeed, with aversion to risk so low once again, much of the most recent credit bubble has largely been forgiven and forgotten.
Thankfully, that era was so excessive that it keeps emanating reminders of its delusion.
For example, RDA Holding, the Reader’s Digest parent that’s the product of a $2.4 billion leveraged buyout from March 2007—including the assumption of about $800 million in debt—just filed its second Chapter 11 in less than four years. Though still one of the most read magazines around, Reader’s Digest has had to part with star siblings Every Day with Rachel Ray and Allrecipes.com to raise cash to try to service its loans. While lawyers call such a second trip to bankruptcy Chapter 22, the company dispensed with little euphemism to call the action an “agreement with key stakeholders to significantly reduce indebtedness.”
Hope, of course, springs eternal in buyout land, especially when trying to explain away the hubris of yesteryear. But the Reader’s Digest example shows how long a bad deal can keep haunting a company.
“After considering a wide range of alternatives, we believe this course of action will most effectively enable us to maintain our momentum in transforming the business and allow us to capitalize on the growing strength and presence of our outstanding brands and products,” Chief Executive Robert Guth said in the news release. (You’d think this was good news.)
Compare this second helping of bankruptcy with the breathlessness of its now six-year-old privatization announcement, where the executive chairman of acquirer Ripplewood Holdings said he was “delighted to complete this agreement and to take Reader’s Digest forward in the next chapter of building its brands and businesses.” The LBO shop projected that the deal for the consumer publisher, which had posted only profit declines and losses since 1999, would yield $20 million in savings. Instead, Reader’s Digest crumpled under the weight of interest expenses that ballooned to $176 million in 2008 from $48 million in 2006—just as its business was juggling deep cyclical and secular declines. The twice-bankrupt company is now hoping to cut its debt load by 80 percent.
Domestic circulation at Reader’s Digest plunged 14 percent in 2008, compared with a drop of less than 1 percent for the top 10 magazines. In June of the following year, the magazine said it would publish only 10 times per year instead of monthly, after earlier cutting 8 percent of its staff, mandating a week of unpaid leave, and stopping 401(k) matches. It was the confluence of revenue losses and a high debt load that slid the publisher into bankruptcy. And again three and a half years later. Reader’s Digest is now necessarily more busy moving around and renegotiating its various tiers of debt than focusing on “the next chapter of building its brands and businesses.”
“Companies with more than one default within a several-year period provide useful examples of the primary reasons why initial attempts at successful reorganization fail,” Fitch leveraged finance analysts Sharon Bonelli and Kellie Geressy-Nilsen wrote on Tuesday. “Key drivers of second defaults are failure to resolve operating cost issues or sufficiently reduce debt. Second defaults are also frequent for issuers in industries that are in a deep cyclical trough or chronic decline.”
You saw it with Tribune’s ill-starred privatization under Sam Zell, and with Philadelphia newspapers’ experience with debt-binged buyouts. Amazingly, the LBO-emboldened and fee-saddled Reader’s Digest pitched a combination with Time Inc. (TWX), the magazine publisher behind Time, People, and Sports Illustrated that is now in talks to bus a bunch of its titles to Iowa.
The Chapter 22′ing of Reader’s Digest is surely destined for the B-school canon, where MBAs will study it to debate a timeless question: Is such “financial sponsorship,” on balance, good or bad for companies? Or were they just better off left to their own declining devices?