Is Reader's Digest About To Get Hitched?

The flagging company may combine with parts of Time Warner

Sometime this month, Reader's Digest Association Inc. had planned to unveil to Wall Street the final phase of new CEO Thomas O. Ryder's program to revitalize the troubled publisher. But the meeting has been pushed back to Feb. 25 because, says Ryder, "we're still in the process of working on it."

Before then, Ryder could reveal something far more dramatic: Sources close to the companies say Reader's Digest and Time Warner Inc. are discussing a deal to combine Reader's Digest with several Time Inc. publications and direct-marketing businesses. The new entity would have about $5 billion in annual sales, double the Digest's current size.

If the deal is consummated, the two companies could cut costs and meld databases to create a direct-mail juggernaut capable of targeting millions of consumers world-wide with family-oriented fare such as Time-Life's '70s Dance Party album or the Digest's condensed books. Time would also throw in Book of The Month Club and several magazines, including Parenting and Southern Accents.

EQUAL PARTNERS. Under the structure being contemplated, Time Warner would become an equal partner with the foundations set up by late Reader's Digest founder DeWitt Wallace that now control 72% of the publisher's voting shares. Public shareholders would own a yet-to-be-determined stake. Ryder, who joined the company last May, would continue as the company's CEO, with Time Inc. CEO Don Logan as chairman.

Time Warner, Ryder, and the foundations won't comment on the talks. Sources close to the discussions say that although negotiations have been going on for months, they could still break off. The stumbling block seems to be convincing the foundations that ceding control to a joint venture with Time would be better than staying independent or selling out altogether.

Without the votes of the foundations--which plan to cut their ownership to 50% by 2000 for tax reasons--there can be no deal now. They are chaired by former Digest Chairman and CEO George V. Grune. He and two other foundation directors sit on Digest's nine-member board.

Still, the foundations may sign off. Since they were set up in the 1950s and 1960s, the foundations have been major supporters of cultural institutions and various causes. But their giving ability has diminished along with Digest's profits. Although Reader's Digest remains the world's biggest-selling magazine, with circulation of 27 million, readership has been declining as its audience ages. The Pleasantville (N.Y.) company's stock is off almost 50% since the beginning of 1996. And since Ryder took over, he has slashed dividends by 78%. He also plans to cut expenses by $350 million, and sold off much of the corporate art collection.

Analyst Dennis McAlpine of Josephthal Lyon & Ross Inc. says Ryder now has to figure out ways to increase revenues and target younger consumers. Merging with the Time assets, he says, "would be a great fit." Digest's direct-marketing business is twice as big as its magazine and that operation could be used to market Time products as well. And the executives guiding the talks fit well, too. In his previous role as a senior executive at American Express Co., Ryder cut a deal that placed several AmEx-owned titles, including Travel and Leisure, under Logan's Time Inc. management.

To help assess their options, the foundations have enlisted Lazard Freres Co. The Digest is being advised by Goldman, Sachs & Co., and Time Warner has retained Morgan Stanley Dean Witter. A conclusion to the talks is likely by the Feb. 25 presentation. "I have been unusually focused on this strategic plan," says Ryder. But with the company's fate residing with the foundations that control it, even he can't know for sure which plan he'll be presenting that day.

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