Reader's Digest sold for $2.4 billion

In what is one of the biggest magazine sales in the past decade, Reader's Digest has agreed to be sold to a private equity firm for $1.6 billion, according to a story from Folio: magazine. The buyer is Ripplewood Holdings Inc., founded in 1995 by Tim Collins, the former managing director of Canadian buyout firm Onex Corporation. Ripplewood currently manages five institutional private equity funds with approximately US$10 billion in total capital.

It is not immediately known what the impact will be on the Canadian edition of Reader's Digest, published by Readers Digest Magazine Canada Ltd. which has always presented itself as operating with a great deal of autonomy and which enjoys a special status in the Canadian market. It also publishes Our Canada.

In a joint announcement, Ripplewood and the board of Reader's Digest Association said that, with the assumption of RD's $776.3 million debt load, the total price tag of the deal will stand at $2.4 billion. The price of the Pleasantville, New York-based company's stock shot up $1.16 to $16.67 a share in late afternoon trading.

Reed Phillips, managing partner of media investment bankers DeSilva & Phillips, said the deal caught many by surprise. “They weren’t for sale,” he said. “I think this is one of those situations where someone approached them and it worked out.”

The deal will move Reader’s Digest, publisher of Reader’s Digest magazine and Everyday with Rachel Ray, from a publicly traded to privately held company, which Phillips called a good move.

“It’s a good thing for a company like the Digest because we’re going through this transformation with the Internet and you can go through it better as a privately owned company,” he said. “When you’re publicly owned, you have to have stable earnings from one quarter to the next. That can be hard when you’re trying to transform a business, which is what we’re seeing now with a company like Time Inc.”

Collins told the New York Times that Ripplewood thinks it can renovate the magazine, removing its prevailing old-fashioned image: “People think of Reader’s Digest as something for their grandmother, but the company has a dynamic base,” said Ripplewood’schief executive, Timothy C. Collins. “We’re not the smartest guys in private equity, but we know how to take content and customer relationship and make them work in new venues.”

Phillips also predicted that the takeover of the publishing industry by private equity firms has only just begun. “What’s going with private equity firms is that they have more money than ever and they’re looking to do bigger deals, putting that money to work,” he said. “Some of these funds are three to four times the size of what they were a few years ago, so they’re looking to do deals that are three to four times the size of what they were doing a few years ago.”

Reader's Digest had revenues of $2.4 billion in 2005 and EBITDA of $185.8 million. The company, which runs on a July to June fiscal year, has suffered two consecutive years of losses. Earlier this month, it announced first quarter revenues of $517.1 million, up from $516.4 in the first quarter of last year. It's operating loss widened to $30 million to the first quarter compared to $7 million a year earlier.

Ad revenue for Reader's Digest fell in the first 10 months of the year 1.5 percent to $242.9 million from $246.7 million in the same period last year. Its ad pages dropped 3.7 percent to 827.37 from 859.57 in the first 10 months of 2005, according to PIB figures. The company's total paid and verified circulation is more than 10 million. The company says its Web site RD.com has 5,244,000 hits and 995,000 unique visitors per month.

New York-based Ripplewood owns Direct Holdings Worldwide, a music distribution service under the Time Life brand, and WRC Media, the publisher of Weekly Reader and World Almanac.

[UPDATE] Here is the story of the sale in the Globe and Mail; and here in the New York Times.