Hearst Leaps to New Level With Deal for Lagardere Magazine Portfolio

Gets Rights to Elle and Outright Ownership of Titles Including Woman's Day, Car and Driver in 15 Countries

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NEW YORK (AdAge.com) -- Hearst has reached a deal to buy 102 magazines and the right to publish Elle in 15 countries, including the United States, from Lagardère for €651 million, or $892 million, the companies said today.

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The price looks like a good one, a media buyer said. The magazines being acquired by Hearst collected €774 million in revenue last year and €49.6 million in earnings before interest charges and taxes. That means earnings are lower than they ought to be -- about 6.4% of revenue, compared with a norm of 10% to 15% -- while the price is higher than it might be, about 13.1 times earnings instead of a multiple of nine to 11, according to Reed Phillips, managing partner at media investment bank DeSilva & Phillips.

"It also means, which I believe is the case, that Hearst sees tremendous cost improvement and will be able to immediately boost the EBIT margin, probably to at least 10%, or €77.4 million," Mr. Phillips said. That would make the price a "very reasonable" 8.4 multiple of earnings.

"Overall this is an excellent buy for Hearst, a no-brainer," Mr. Phillips added.

The deal should help Hearst, the publisher of magazines including Cosmopolitan and Good Housekeeping, reach a new level, using its expanded reach among consumers to better compete for major advertisers. It could also, however, yield a few new tensions as Hearst incorporates components with a strong French culture and, in the case of Elle, that compete with Hearst titles such as Harper's Bazaar.

Lagardère has been trying to sell much of its magazine portfolio outside France because it anticipated an uphill climb to further growth, a climb that companies with more international assets would be better able to handle. Its United States operation, Hachette Filipacchi Media U.S., has endured heavy cost cuts over the past few years and the sale of enthusiast magazines including the U.S. editions of Popular Photography, American Photo, Boating, Cycle World, Flying and Sound & Vision. Hachette also dropped out of the magazine industry association in a move that simultaneously saved money and suggested declining ambitions in the U.S.

Lagardère did not want to part with Elle entirely, however, which is why Hearst has only been able to secure publishing rights -- which exclude merchandising, Lagardère said, reserving a potentially valuable area for itself. Hearst will pay Lagardère an annual royalty tied to revenue at the Elle editions it publishes.

Hearst may sell some of the other titles it is picking up in the deal, observers have said. Beyond Elle, brands it is buying in include Woman's Day, Car and Driver, Road & Track and Red in some or all of their markets.

In addition to the U.S., the deal covers the United Kingdom, Italy, Spain, Russia, Ukraine, China, Japan, the Netherlands, the Czech Republic, Hong Kong, Mexico, Taiwan, Canada and Germany. Hearst said it expects to complete the acquisition by the third quarter.

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