An article in the Star-Telegram offers an excellent "insider's view" of Reader's Digest' Chapter 11 bankruptcy, which was actually prearranged with the compliance of the majority of its creditors. A general interest magazine that has been in business since 1922 Readers' Digest has seen its readership drop from a peak of 17 million in the 1970s to only 8 million today. But this bankrupt publisher is not alone in struggling financially. High-profile magazines such as Conde Nast's Portfolio, Domino and Blender have already shut-down due to the pressures of declining ad revenue and readership.
But for a company that made its name as a magazine that appealed to the "ordinary" American, Reader's Digest's 2.2 billion in debt is shocking. The article gives us a little insight into what happened that this household name has now filed bankruptcy:
"The company piled on debt following a $1.6 billion leveraged buyout in 2007 by investors led by Ripplewood Holdings LLC, a New York private equity firm, to take Reader's Digest private. In such a transaction, investors typically borrow heavily to acquire a company, betting that operations would generate enough cash to cover the debt payments. But signs of trouble have since emerged. In June, Reader's Digest magazine cut its circulation guarantee to advertisers to 5.5 million from 8 million, and lowered its frequency to 10 issues a year from 12."
In a bid to save itself from total liquidation, Reader's Digest prearranged their Chapter 11 bankruptcy which will give lenders a 92.5 percent ownership stake in exchange for lowering the company's indebtedness to $550 million from $2.2 billion. Already 80 percent of the company's most important creditors have agreed to the terms of the Chapter 11 bankruptcy, which will increase the possibility of a quicker exit from bankruptcy.
Reader's Digest plans to exit Chapter 11 bankruptcy in 45 to 90 days. But it may be a lot smaller company than they had hoped when they decided to take the firm out of the control of non-profit and go public.