A bitter pill to digest

Timothy Collins' acquisition of Reader's Digest Association in March 2007 was more than an effort to revive a faded magazine icon. It was a key step in a plan to build a media and marketing group that led the buyout investor to later approach Time Warner about merging with its magazine unit.

That ambition collapsed this week when Reader's Digest said it planned to file for bankruptcy as declining ad sales threatened its ability to service $2.2 billion (Dh8bn) of debt, most taken on in the takeover led by Ripplewood Holdings Inc, the New York-based private-equity firm Collins started in 1995.

Reader's Digest is a high-profile failure that blemishes Collins' record as a successful dealmaker. A 52-year-old former Lazard Freres banker and executive at Onex Corp, Canada's largest buyout firm, he made his name with the turnaround of insolvent Long-Term Credit Bank of Japan, which generated a paper profit of about $5.8bn when it re-emerged as a public company in 2004.

"Tim has had far more successes than failures, and has been ahead of others in seeing global opportunities," Robert Kindler, global head of mergers and acquisitions at Morgan Stanley in New York and Collins' former lawyer, said in a telephone interview. "Every significant private-equity firm has had companies that have filed for bankruptcy."

Media companies that have already filed for bankruptcy include Tribune Co, which publishes the Chicago Tribune, and the owner of the Philadelphia Inquirer.

Collins bought WRC Media, the publisher of Weekly Reader magazines for school children, in 1999. Five years later he bought Time Warner's direct-marketing arm, Time Life, which Ripplewood later renamed Direct Holdings US Corp.

Attempts to turn the companies around were floundering when Collins bought Pleasantville, New York-based Reader's Digest and its pocket-sized magazine with a worldwide circulation at the time of 18 million for $2.4bn including debt. WRC Media had already violated debt agreements and was on the verge of bankruptcy. Direct Holdings had posted two years of net losses.

Ripplewood projected that the transaction, which included merging WRC Media and Direct Holdings with Reader's Digest, would yield $20m in savings. The firm used some of the deal financing to pay down $168m of WRC Media's and Direct Holdings' debt. Ripplewood and its co-investors contributed at least $375m of equity to the deal.

Ripplewood's partners in the takeover included Rothschild Bank, a private bank in Zurich; GoldenTree Asset Management, a New York-based fund manager; GSO Capital Partners, a New York-based hedge fund now owned by Blackstone Group; Magnetar Capital Partners, an Evanston, Illinois-based hedge fund; and Merrill Lynch & Co, the New York-based securities firm acquired by Bank of America Corp last year.

In rolling WRC Media and Direct Holdings into Reader's Digest, Collins hoped to revitalise the companies and make additional deals. He approached Time Warner about a combination with its Time Inc magazine unit, whose publications include People and Sports Illustrated, according to people familiar with the situation. Collins was rebuffed, in part because of the 15 per cent premium, or $17 a share, he had paid for Reader's Digest, one of the people said.

Collins declined to comment, as did Edward Adler, a spokesman for Time Warner in New York.

After the takeover of Reader's Digest, which had posted profit declines or a loss since 1999, interest expenses ballooned to $176m in 2008 from $48m in 2006. Collins thought the company could leverage its reach to create a new advertising-based business and boost the direct- marketing revenue it traditionally relied on, according to people familiar with the company.

Ripplewood installed Mary Berner as chief executive officer. She was previously president of Condé Nast's Fairchild Publications and is the sister of Robert Berner, a Ripplewood executive at the time who had helped lead the purchase.

Collins also added media luminaries to Reader's Digest's board, including Andrew Stephen Bower Knight, a former editor at the Economist and chief executive officer of London's Daily Telegraph, and Andrew Lack, now chief executive officer of Bloomberg LP's multimedia group. Previously, Lack was president of NBC News from 1993 to 2001 and went on to become president of National Broadcasting Co and chief executive officer of Sony BMG Music Entertainment.

The campaign to increase advertising couldn't have come at a worst time. US circulation at Reader's Digest plunged 14 per cent last year to 8.31m from 9.68m, compared with a drop of less than one per cent for the top 10 magazines, according to Audit Bureau of Circulations data.

Advertising sales at Reader's Digest magazine fell 7.2 per cent to $121.2m in this year's first half, compared with 2008, according to the Publishers Information Bureau.

"Private equity hopes economies of scale will make organisations more efficient but that never solves the revenue growth problem," said Giles McNamee, MD in the Boston office of investment bank McNamee Lawrence & Co. "It's like tying two boat anchors together and hoping they'll float."

In June, Reader's Digest said it would only publish 10 times a year instead of 12. The company announced a plan in January to cut eight per cent of its 3,500 jobs, enforce a week of unpaid leave for most workers and suspend matching contributions to 401(k) retirement plans.

The loss of revenue combined with Reader's Digest heavy debt load was ultimately too much for the company to withstand.

"They achieved their cost savings targets, but the underlying business was deteriorating at a faster rate," said John Puchalla, a credit analyst at Moody's Investors Service in New York. "They had a deep hole to climb out of."

Collins, who joined the board of New York-based Citigroup in July, has generated stellar long-term results, according to a person familiar with the matter. Ripplewood's funds have returned $9.5bn to investors, more than triple the $3bn they've put in since 1995, according to the person, who asked not to be identified because the information is private.

Collins is the biggest shareholder and a board member of RHJ International, a Brussels-based holding company he took public in March 2005. RHJ, which is seeking to acquire General Motors Corp's Opel division, has fallen 75 per cent since its share sale.

Ripplewood Partners II, the fund started in 2001 that holds Reader's Digest, posted a 1.6 per cent return, including payouts and the value of current holdings, as of 2008, according to data posted by the California Public Employees Retirement System, a Collins investor, on its website.

After factoring in the loss on Reader's Digest, Ripplewood Partners II may double investors' money over the life of the fund, said the person familiar with the firm.

Collins, who enjoys fishing, has spent much of the last year working from his vacation home in the remote Adirondacks region of New York state, according to people who know him. He hired former American Express Co. CEO Harvey Golub three years ago as Ripplewood's chairman to oversee the firm's operations.

Collins relies on a large number of connections he has built over the years to find and close deals. His reach extends beyond Wall Street, and he has supported and gotten to know Democratic Presidents Bill Clinton and Barack Obama, while also maintaining a friendship with Ralph Reed, the former head of the conservative Christian Coalition, according to people who know him.

Ripplewood become a major player in private equity as Collins picked investments that his larger and more established counterparts had little interest chasing, according to people close to Collins.

"Tim knows how to network better than anyone I've ever seen," said John Duryea, a Ripplewood co-founder who is now head of Ospraie Management's Special Opportunities Fund in New York. "He knew the right people and connected the dots to get the deal done."

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