Secured creditors and secured note holders are onboard with the new debt deal, which was agreed upon prior to the Chapter 11 filing.
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 also filed for bankruptcy in August 2009, citing a drop in advertising spending and the debt load incurred in its acquisition.
The company listed assets and debt of more than $1 billion each in Chapter 11 documents filed yesterday in U.S. Bankruptcy Court in White Plains, New York. 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.
This debt-to-equity approach is quite common. It’s a far more efficient approach to managing major debt than the liquidation process, in which creditors are often hit with insoluble problems in terms of getting back value from loans. It also looks like a very productive move on the part of Wells Fargo, extending its media reach considerably.
Reader’s Digest has apparently been trying to restructure itself internally for some time:
“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,” Robert Guth, Reader’s Digest’s chief executive officer, said yesterday in an interview.
Mr Guth is being a bit modest. This is also the best practice way to cut costs, develop markets and offload infrastructural dinosaurs from the print era. Reader’s Digest, in fact, has a large range of publications in the educational sphere and other core commercial zones which are well suited to development in both conventional and electronic media. Evidently the debt caught up with the company before the benefits of this reconfiguration took effect.
Reader’s Digest has also been selling some assets, notably Allrecipes.com
for $175 million. Asset sales can be a mixed blessing, but this move also looks like a move out of a saturated, specialized area of publishing which is at odds with the usual Reader’s Digest big picture business.
For publishers, this case is well worth watching. Reader’s Digest is ironically the direct lineal ancestor of modern, high flexibility publishing. It was the first “we sell everything” publisher to enter into this gigantic market and develop it. The market is now dominated by its (very) remote descendant Amazon and the new tier of all-purpose/all-market publishers. While the new publishers don’t have the historical baggage of Reader’s Digest, the fix is very interesting in terms of its ability to provide a way out for trapped publishers and retain a working business.