A combination of increased debt and an abnormal operating environment marked Moody's Investors Service's Baa3 assignment of Reader's Digest's pending $850 million senior secured term loan. The new credit facility will be used to fund the $760 million acquisition of Reiman Holding Company and it marks a dramatic increase in debt for the company. Reader's Digest will have $850 million to $900 million in debt after the transaction and a 3 times debt to EBITDA ratio. This compares to historical balance sheet debt of $150 million to $250 million and leverage ratios of less than 1 times debt to EBIDTA, explained Moody's analystGlenn Eckert.
In addition to the increased debt, the company's core businesses are currently struggling in a tough operating environment. "A lot of their existing businesses have experienced decline," Eckert said, adding that these are anomalous times in the magazine's publishing history. The anthrax scare has affected the company's mail order promotions and consumer focus has moved towards more news-orientated content away from the entertainment and general interest areas where the publication has carved out its niche. "Hopefully we will reach a more normal operating environment," he said. The company also faces the challenges associated with the integration of the two companies and long term erosion of readership.
Moody's does note the strength of Reader's Digest's worldwide brand recognition and large circulation base with the publication holding the title of number one global general interest magazine. Reiman is also a sound asset, said Eckert, noting its high operating margins and strong cash flow. William Adler, company spokesman, said Reader's Digest was expecting such a rating and is comfortable with the higher debt level because Reiman's free cash flow alone could service the debt. "We like the acquisition as a stand alone just based on its performance last year but we love the idea of the synergies of the two companies," he added.