Reader’s Digest Brand is Key to Strategy in Bankruptcy

Exploiting Reader’s Digest’s iconic brand is the latest strategy for its private equity owners, who put the 91-year-old publisher into bankruptcy to shed $465 million in debt as consumers shift to electronic media.

Like recently bankrupt Hostess Brands Inc., maker of Twinkies and Wonder Bread, and bankrupt Eastman Kodak Co., inventor of Kodachrome film and Instamatic cameras, Reader’s Digest has a potentially valuable name.

Reader’s Digest, founded by DeWitt and Lila Wallace, went public in 1990. An investor group led by private-equity firm Ripplewood Holdings LLC bought it in 2007 for $1.6 billion and the assumption of about $800 million in debt. The company filed for bankruptcy for the first time in August 2009, citing a drop in advertising and the debt incurred in its acquisition.

“The brand will carry on, and that name has value,” Van Conway, chief executive officer of turnaround management firm Conway MacKenzie Inc., said in a telephone interview. He said also that a company burdened by debt must “be nimble enough” to deal with the changing world of electronic readers.

RDA Holding Co. listed assets and debt of more than $1 billion each in Chapter 11 documents filed Feb. 17 in U.S. Bankruptcy Court in White Plains, New York.

Company officials “have embarked on an ambitious but necessary set of initiatives to transform the debtors’ core businesses around their iconic brands,” said Robert Guth, Reader’s Digest’s chief executive officer, in court papers.

Buffeted by Downturns

After the earlier bankruptcy, the company in 2010 “continued to be buffeted by economic downturns, domestically and internationally, and the accelerated shift from traditional print media and marketing to digital media and marketing, severely hampered the debtors’ ability to thrive,” Guth wrote.

Under a restructuring agreement supported by Wells Fargo & Co., $465 million of remaining senior notes will all convert to equity. The company expects to have about $100 million in debt when it exits Chapter 11, about an 80 percent reduction.

The Hostess bankruptcy was different in that its problems involved labor unions, while with Reader’s Digest, “there’s too much debt,” Conway said. “That doesn’t mean you couldn’t come out and be profitable” after bankruptcy, he said.

Among the company’s largest unsecured creditors listed in court papers were Luxor Capital Group of New York, listed as administrative agent for a $10 million loan, and the U.S. Federal Trade Commission, with an $8 million claim.

Ab Circle Pro

In 2010, the FTC started an investigation into the marketing of the Ab Circle Pro fitness product, sold by a Reader’s Digest subsidiary. As part of a 2012 settlement, the company agreed to pay as much as $23.8 million, with Reader’s Digest agreeing to be responsible for amounts due.

During restructuring, “We have had an ongoing process to simplify and rationalize our international business by licensing our local markets to third parties, to other publishers, to other investors and that has been a big part of our effort to streamline the company and bring in proceeds to bring down debt,” Guth said in an interview on Feb. 17.

The company’s flagship print magazine is read by more than 25 million people, according to its website. The company publishes 75 magazines globally including 49 editions of Reader’s Digest, Taste of Home, the Family Handyman and Birds & Blooms. Reader’s Digest “sold more digital editions in December than we did newsstand editions,” Guth said.

Meredith Sale

The company had some success in the sale of Allrecipes.com “but frankly haven’t had enough success on that front,” Guth said. Last year, Reader’s Digest sold Allrecipes for $175 million and Every Day with Rachel Ray for an undisclosed amount to Meredith Corp.

“The key message here is that we have a lot of confidence in the future of the business based upon the success of the ongoing operational transformation, but we haven’t had as much success with the balance sheet side of it and we need this process to help accelerate that,” Guth said.

“The much more modest debt level puts us in a position to continue to really execute these plans and push these brands forward well into the future, so it’s a very good new lease on life,” he said.

The company said it reached a pre-petition accord with its secured lender and more than 70 percent of its secured note holders. The bankruptcy was filed to implement the pre-arranged restructuring.

Reader’s Digest plans to borrow as much as $45 million in new financing from a group of secured note holders to help fund operations as it restructures, according to court papers. The financing is part of a $105 million facility and is open to note holders who agree to support the restructuring, according to a company statement. The company said its business won’t be interrupted and obligations to customers will be fulfilled.

North America

“The Chapter 11 process, which will facilitate a significant debt reduction, will enable us to continue to redefine our business by focusing our resources on our strong North American publishing brands, which have shown a new vitality as a result of our transformation efforts, particularly in the digital arena,” Guth said in the statement.

Hostess, previously known as Interstate Bakeries Corp., left an earlier bankruptcy in 2009 under the control of Ripplewood and lenders. The company, based in Irving, Texas, entered bankruptcy again in January 2012 after changes in American diets curbed sales as ingredient costs and labor expenses climbed.

Kodak, based in Rochester, New York, filed for bankruptcy in January 2012, and CEO Antonio Perez has been selling businesses to shrink the company and fund its shift into commercial printing and packaging.

International Operations

RDA’s international operations, including Canada, are not part of the filing.

“We aren’t the typical iconic American brand that’s challenged by conversion to digital,” Guth said. “We just had a complicated company that had to be simplified so that those iconic brands and those great customer relationships could thrive with continued emphasis on new formats and new audiences but with the same brand and the same products.”

The case is In RDA Holding Co. Inc., 13-22233, U.S. Bankruptcy Court, Southern District of New York (White Plains). The previous bankruptcy case is In Re Reader’s Digest Association Inc., 09-23529, U.S. Bankruptcy Court, Southern District of New York (White Plains).

To contact the reporter on this story: Dawn McCarty in Wilmington at dmccarty@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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