UPDATE 1-American Greetings to buy bankrupt rival RPG

Dec 30 (Reuters) - American Greetings Corp (AM.N), the second-largest U.S. greeting-card maker behind Hallmark Cards, will buy bankrupt rival Recycled Paper Greetings Inc to enhance its humorous greeting-card offerings.

The deal consideration includes a combination of $54.7 million of new 7.375 percent notes due in 2016 and up to $18.4 million of cash in addition to the $44.2 million investment made by American Greetings in July.

The terms of the deal also include the restructuring of RPG's debt under a Chapter 11 reorganization process.

Under this process, RPG's day-to-day operations will continue as usual as American Greetings provides financing for business operations through the Chapter 11 proceedings.

American Greetings will also provide up to $10 million Debtor in Possession (DIP) financing to RPG.

Cleveland, Ohio-based American Greetings expects RPG's reorganization to provide "meaningful" tax benefits compared with alternative acquisition structures.

Recycled Paper Greetings is a Chicago-based maker and designer of humorous greeting cards with annual net sales of about $80 million.

American Greetings, which sells Carlton Cards and Plus Mark, plans to continue to use the Recycled Paper Greetings label after the deal.

In a separate statement, RPG said American Greetings has indicated RPG CEO Jude Rake and its senior management team will continue leading the unit after the deal.

Both companies expect the reorganization process to be completed by the end of American Greetings' first fiscal quarter.

American Greetings shares, which have lost more than two-thirds of their value in the past year, were up 23 cents at $6.63 in morning trade on the New York Stock Exchange. (Reporting by Dhanya Skariachan in Bangalore; Editing by Pratish Narayanan)