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Reader's Digest Agrees to be Sold in Biggest Consumer Deal of the Year

By Marrecca Fiore

In the biggest consumer deal of the year, Reader's Digest Association agreed today to be bought for $1.61 billion or $17 a share by an investment group led by private equity firm Ripplewood Holdings LLC.

In a joint statement with Ripplewood, Reader's Digest says its board of directors has approved the sale and recommended its shareholders do the same. With the assumption of Reader's Digest's $776.3 million debt-load, the total price tag of the deal stands at $2.4 billion. The transaction is expected to close in the first quarter of the year. News of the sale shot the price of the Pleasantville, New York-based company's stock up $1.16 to $16.67 a share as of 3:30 p.m..

Reed Phillips, managing partner of media investment bankers DeSilva & Phillips, called the deal one of the magazine industry's biggest of the past decade. This year only one deal has had a higher price tag and that's the acquisition of b-to-b publisher VNU by a consortium of private equity firms for $9.7 billion.

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."

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."

Whether CEO Eric Shrier will continue to lead the company remains to be seen. Todd Fogerty, speaking on behalf of Ripplewood, said it was to early in the process to say. He said the company plans to file a proxy statement on the merger with the Securities and Exchange Commission within the next several days. Reader's Digest was advised by Goldman Sachs and Michael R. Lynch. The Ripplewood-led investment group includes J. Rothschild Group, GoldenTree Asset Management, GSO Capital Partners, Merrill Lynch Capital Corp. and Magnetar Capital.

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 has 5,244,000 hits and 995,000 unique visitors per month.

New York-based Ripplewood was founded in 1995 by Tim Collins, the former managing director at Canadian buyout firm Onex Corp. The company owns Direct Holdings Worldwide, a music distribution service under the Time Life brand, and WRC Media, the publisher of Weekly Reader and World Almanac.

Blue Harbor Group, the fifth-largest institutional shareholder of Reader's Digest with close to 4.8 million shares of the company valued at almost $66.9 million, threw its support behind the transaction in a statement released today. "Blue Harbor believed that the company's shares were undervalued in the market and recommended that Reader's Digest consider a going-private transaction," the statement said. "We applaud Reader's Digest's board on the transaction announced today."

By Marrecca Fiore

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