Reader's Digest $1.3 billion credit facility expected as January business

By Sara Rosenberg

New York, Dec. 20 - The Reader's Digest Association, Inc.'s proposed $1.3 billion senior secured credit facility is expected to launch with a bank meeting sometime in January, according to a market source.

JPMorgan, Citigroup, Merrill Lynch and RBS Securities are the lead banks on the deal.

The facility consists of a $1 billion seven-year term loan and a $300 million six-year revolving credit facility.

Proceeds from the credit facility, along with $600 million in senior subordinated notes, will be used to help fund the leveraged buyout of Reader's Digest by an investor group led by Ripplewood Holdings LLC.

It is possible that the term loan will actually carry a size of $1.16 billion and the bonds will carry a size of $750 million, depending on if Ripplewood combines Reader's Digest with two of its portfolio companies - Direct Holdings Worldwide LLC, a direct marketer of entertainment products, and WRC Media Inc., a publisher of supplementary educational materials - on the closing date of the LBO.

Other LBO financing will come from $375 million in equity, as well as from $330 million of 12-year PIK preferred stock and $110 million of related common stock that will be purchased by J.P. Morgan Securities Inc.

If Reader's Digest is merged with the two Ripplewood portfolio companies, then the PIK would be sized at $280 million, the related common stock would generate $93.3 million in gross proceeds and Reader's Digest would use up to $70 million in cash on hand.

Completion of this potential combination and related increased debt financing are not conditions to closing of the LBO.

In connection with the buyout, Reader's Digest will tender for all of its outstanding 6½% senior notes due 2011.

If any of the company's 6½% notes remain outstanding on the closing date of the LBO, the term loan will be reduced by the amount of the remaining notes.

Under the LBO agreement, Reader's Digest shareholders will receive $17.00 per share in cash, for a total transaction value of about $2.4 billion.

In addition to Ripplewood, the investor group includes the J. Rothschild Group, GoldenTree Asset Management, GSO Capital Partners, Merrill Lynch Capital Corp. and Magnetar Capital.

The transaction is expected to close in February, subject to the receipt of the affirmative vote of common shareholders, the availability of the investor group's committed debt and preferred equity financing and other customary conditions, including antitrust clearance.

A special shareholder meeting to vote on the transaction has been scheduled for Feb. 2.

Reader's Digest is a Pleasantville, N.Y., publisher and direct marketing company that creates and delivers products and content for magazines, books, recorded music collections, home videos and online web sites.

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