Readers Digest Financial Analysis

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BMGT440
Section 0301

Readers Digest Case
Founded in 1922, by DeWitt and Lila Wallace, Readers Digest described itself as “A reader-driven, family magazine” that used both freelance and staff writers to choose segments of or summarize articles and books. Going public in 1990, Readers Digest had a worldwide circulation of 23 million and by the time of this case was being published in 48 editions and 19 languages. The magazine had over 100 million readers a month. Reiman Holding Corporation “Published magazines and books about cooking, gardening, country lifestyle, nostalgia and crafts” and was widely admired by the staff of Readers Digest. Reiman Corporation had a devoted fanbase and the majority of its magazines were written by their readers themselves. Because of this Reiman had seen strong and steady growth in the years prior to this case while other firms in this industry had seen a decline in sales and profits. As this case picks up, Readers Digest has just decided to purchase Reiman Holding Corporation for $760 million cash. Additionally, acquisition costs were expected to total $8.2 million dollars. The problem is that Readers Digest has to figure out how they want to finance this acquisition, they are stuck trying to decide between issuing debt, equity, or preferred stock. “To finance the Reiman acquisition and other planned projects, RDA was looking at a$950 million term loan agreement with a syndicate of banks and other financial institutions.” The loan would be secured by the firm’s assets and included strict covenants. The loan agreement called for quarterly principal repayments, starting in the first quarter of fiscal 2003, with the final payment due in 2008. RDA expected the interest rate on all of its borrowings would be 3.8% in 2002 and 6% for the remaining years of the loan. In the past, RDA had been conservative with its financing. When it acquired Books Are Fun, LTD, RDA used only internal funds and 120$ in bank loans with an...
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