Reader’s Digest: When it went private in 2006, Reader’s Digest seemed to share with its readers the characteristics of small-town America: pleasantly hokey, stable, even boring. Like its subscribers, though, the company gullibly believed in the story of easy credit. Sadly, the end to this story isn’t nearly as pleasant as the magazine’s current feature on heroic pets that saved their owners from certain death. The company has been forced into a pre-packaged bankruptcy. All equity will be wiped out and debtholders will see a 75 per cent reduction in the value of their holdings.
When the private equity consortium led by Ripplewood took the company into a leveraged buyout, it left Reader’s Digest saddled with more than $2 billion of debt. At the time, that didn’t seem particularly egregious. The company had a long history of stable revenue and profits — sales were essentially flat at $2.5 billion in the decade preceding the buyout. And its sleepy management needed a bit of shaking up. In hindsight, the debt load only seemed reasonable because the rest of Corporate America was gorging on even greater quantities of leverage relative to Reader’s Digest.
But the downturn has been particularly unkind to Reader’s Digest. The economic downturn has hit advertising revenues in the US and overseas. Worse, the shift to the internet has left Reader’s Digest looking like a small town that has been bypassed by the freeway. In the last quarter revenues shrank 17 per cent compared to the same period a year ago. Operating losses were $42 million. Shrinking revenues mean future losses are likely to be even worse.
Whether the firm can survive as a much smaller entity is unclear. Shifting readers online is a difficult process — particularly for publications like Reader’s Digest whose natural habitat are dentists’ offices and bathrooms. But it wouldn’t have had even a chance at economic redemption without this massive cut in debt. The same might be said for many of its 8 million US readers.
