American giant acquires a vast portfolio of international titles belonging to the French media conglomerate, passing Condé Nast as the world's top magazine publisher. But was it worth the pricetag?

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PARIS - There was nothing unexpected in French media conglomerate Lagardère's announcement this week that it had it sold its international magazines to US publishing giant Hearst, in a deal sealed December 31. But there was one element of surprise: the price. The American group, publisher of Harper's Bazaar and Cosmopolitan, has agreed to pay 651 million euros ($896 million) in cash for 102 titles in 15 countries. Beyond this, Lagardère Active has also retained control of its most famous title, French Elle, and will continue to receive royalties from the Elle International titles which Hearst now has the right to publish in 15 countries including the United States, Europe, Russia and China. The annual income from this, based on net sales in 2010, is expected at roughly eight million euros ($11 million).

According to Lagardère, which was advised in this operation by JP Morgan, the international division made a turnover of 774 million euros ($1.06 billion), and earnings before interest and taxes of 37.7 million euros ($51.8 million) in 2010. This compared with losses of 2.5 million euros ($3.4 million) on revenues of $712 million ($979 million) in 2009. Beyond, Elle, the international portfolio includes Woman's Day, Car and Driver in the United States, as well as the Russian version of the weekly television guide Télé 7 Jours which sells five million copies a week. The Russian subsidiary, which is a joint venture with a local partner, contributed 13.6 million euros to the group's operating profit last year.

The 651 million euro price tag represents a multiple of more than 17 times the 2010 pre-tax earnings, a much higher ratio than that seen elsewhere in the magazine sector. "Listed groups like Meredith in the United States, Mondadori in Italy, or Sanoma in Finland, are generally valued on multiples of between eight and 10," says Christopher Cherblanc, financial analyst at French bank Societe Générale.

If Hearst has agreed to pay a high price, it is primarily because it expects a turnaround in results. The advertising crisis, which hit US magazines particularly hard, slashed revenues in 2009 and 2010. But as the crisis comes to an end, the group, which has become more streamlined under the leadership of Didier Quillot, is well-positioned to profit from the uptick in advertising. Beyond this, emerging markets like China and Russia are showing "double-digit growth and strong profitability," said a source close to the group.

Beyond the international synergies, Hearst wants to make the international edition of Elle the world's number one upmarket women's magazine, in the face of its rival Conde Nast, publisher of Vogue and Vanity Fair. "Elle is well positioned in the United States but also in Europe, particularly in Britain, as well as in China and Russia: Hearst has gotten hold of a major brand in the international press. It is a flagship asset that will attract large international advertisers," says one expert.

Will Elle remain French?

According to Cherblanc's calculations, Elle International represents more than half the activity of the acquired division. According to some sources, Hearst may even give up Woman's Day, Car and Driver and Road & Track in the United States once the deal is out of the way. "There are publishers out there are willing to buy them for 250 million dollars," one banker suggested.

It remains to be seen whether control of the Elle brand will remain in France, even though both parties have said that this is the plan. The license agreement states that Lagardère will continue to oversee the syndication and co-production of content. It also stipulates that strategic decisions, such as the appointment of editors, will be made jointly, and Lagardère will continue to develop a global network of advertisers around Elle. Some industry experts suspect, however, that decision-making will gradually shift from Paris to New York. Others fear that French Elle will ultimately be sold to Hearst too.

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