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 0 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 interest rate of 6. 4%. While RDA rarely used debt, it had about $29 million in preferred stock. RDA had paid out high dividends until the late 90s when it reduced them dramatically. Additionally, just a few months before this case RDA decided to change its corporate structure.
The object of this change was to make it so that there was only one type of common stock instead of two. RDA was eventually sued by holders of both A and B stocks, with both sides claiming this recapitalization was unfair to them. This further complicated RDA’s decision about how to fund this acquisition. RDA was expected a strong fiscal year for 2003, partly based on its future predictions for Reiman Corporation. The Board of Directors decided the term loan was certainly a good possibility; However, they were concerned that they would not be able to accurately predict how much the interest rate of the loan would fluctuate in the future.
The board also considered financing with equity, “Book value per share ranged from $4. 40 to $4. 75 during the past year, compared to a $23. 00 market price. ” Because of the high market to book ratio and the low dividend yield ratio this seemed like a viable option. The CFO’s office however “Predicted an industry earnings and dividend growth estimate of 11. 5% for the next five years,” which was concerning. In the past RDA had successfully financed with preferred stock so it considered this option as well. The dividend yield on $100 par value stock would be 5%, and RDA expected it could issue $950 million in preferred stock if it chose not to take the term loan. ” Analyst Mark Lee had all the necessary information and he decided that he would first look at whether or not RDA would be able to “Handle the proposed debt issue without investors and creditors deciding that the debt. ” Then he decided he would weigh the costs and benefits of preferred stock and common equity against those of the debt issue. With this analysis he would be able to make a solid recommendation to his boss he thought.
The Reiman line will help generate about $1 billion in sales, according to Reader’s Digest. Reiman can also take advantage of its new owner’s international reach to market its titles overseas. Additionally, this will also create synergies between the product lines. The two audiences are similar in that they are “family oriented and have traditional values,” In the short term, Reader’s Digest will probably study “the Reiman formula, and the response rates they get for their direct mail without using highly promotional techniques,”
Cite this Readers Digest Financial Analysis
Readers Digest Financial Analysis. (2016, Oct 29). Retrieved from https://graduateway.com/readers-digest-financial-analysis/