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Reader's Digest Gets Junk Debt Classification

The Reader's Digest Association Inc. had its debt rating downgraded to junk status by Standard & Poor's Corp., according to a report in The Wall Street Journal yesterday.

The junk classification came because of the company's announcement that it will acquire Greendale, WI, publisher Reiman Publications for $760 million. Reiman publishes 12 cooking, gardening, country living and nostalgia magazines and has a mail-order business and book club. The largest title, Taste of Home, is the country's top-selling food magazine. Reiman is principally owned by investment firm Madison Dearborn Partners Inc., Chicago, and senior management of Reiman.

According to the Journal, the acquisition will increase the company's financial risk. Some Reader's Digest shareholders tried unsuccessfully to derail the deal before it went through. On March 12, the Journal reported that Highfields Capital Management tried to gain control of Reader's Digest from Wallace Reader's Digest Funds because it opposed the acquisition. However, Wallace Reader's Digest Funds, which controls 50 percent of Reader's Digest Association Inc.'s voting shares, rejected the proposal.

The cash transaction is being paid for through financing from J.P. Morgan and Goldman Sachs. It has been structured as an asset purchase. The acquisition, which is the largest ever for Reader's Digest, is expected to close before June 30.

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