Gruner + Jahr May be Europe’s Largest and Most Successful Magazine Publisher, But Its US Operation Was An Absolute Disaster That Severely Tarnished the Brand. Its Solution -- Hold A Fire Sale and Then Get the Hell Out of Dodge City

Philip Stone May 26, 2005

In announcing its sale of Family Circle, Parents, Fitness, and Child to Meredith Corporation for $350 million – about half of what they should have gotten if the magazines had been well looked after -- Gruner +Jahr has finally given up the ghost of its US magazine operation. If it can’t sell its two remaining properties, Inc. and Fast Company, by June 30 then Meredith will take them on and sell them probably in an auction.

And that will end a very sorry affair for the German company, owned 75% by Bertelsmann. And although the Germans claim it was an all-American management team that caused all the problems, the word in the US is that is was because of decisions made in Germany, and in some cases because no decisions were made in Germany, that the US branch faltered.

Even in getting out of its predicament senior Bertelsmann executives gave conflicting stories on what they wanted to do. Last October Bertelsmann Chief Executive Gunter Thielen told Reuters he had no plan to sell G+J USA, echoing an earlier statement by G+J CEO Burnd Kundrom who said “It wouldn’t make a lot of sense to sell the business just because we are having a minor crisis”

If poor performance by all the magazines plus a very public lawsuit involving a major US personality, Rosie O”Donnell, whose magazine G+J published but then closed, a decision that did not make the outspoken lady happy, plus accusations which came out in court that G+J inflated circulation figures are considered “minor”, it would be interesting to know what G+J would have considered “major”.

French media giant Lagardere, which has publicly stated it wants to expand its US operations, said it asked Bertelsmann recently if the magazines were for sale and was told they were not.

Whatever the true story of how the sale came about – some reports say informal discussions started more than a year ago but with serious discussions taking place only over the past two months --  G+J has taken a financial bloodbath.

It bought Fast Company (FC) for $550 million in 2000, and in the same year it paid around $200 million for Inc.   In 1994 it had paid the New York Times $325 million for Family Circle, McCalll;s and some other titles, one of which, McCalls, which was turned into Rosie, was closed..

Media analysts looking at the current sinking financial performance of both Inc. and FC believe the going price for both will be no more than $150 million, although some are saying that because of liabilities to subscribers for future issues their value may be considerably less.

Thus far this year Inc’s advertising revenue is down 9.2% with ad pages down 14.7% and at FC advertising revenue is down 13% and ad pages are down 17%.

Meredith comes out of the deal a far stronger company, and will be second only to Time Warner in US magazine circulation. Meredith owns some 200 magazines and is particularly strong in the woman’s field. The four magazines from G+J that reach approximately 135 million women will bolster that dominant position.

In the CBS-TV western Gunsmoke, badguys were told by Marshall Dillon to "Get the hell out of Dodge City."

Back in Germany the basic philosophy behind the sale seemed to be explained as  get out at almost any cost of something that is not adding large positive numbers to the bottom line, so that funds and management time can concentrate on what does bring in the big money.

Kundrun explained that G+J planned major expansions in the next few years and that means withdrawing now from businesses that do not produce the required profitability or give G+J a leading market position (it was the sixth largest magazine publisher in the US).

Torstein Klein, president of G+J International division, told an international magazine conference in New York that the US magazines failed to meet G+J’s profit goals. “We’re committed to the magazine business, but we are also committed to very high profits,” he said.

He said agreeing to the sale was a very tough decision.

Bertelsmann itself is still heavily involved in the US. It owns Random House, the world’s largest book publisher that last year printed Bill Clinton’s memoirs, selling 2.6 million copies, and it also published the fictional best seller DaVinci Code.  It owns 50% ownership of BMG, the music division that merged with Sony’s music division to become the world’s second largest label, and it announced this month it would buy Columbia House, a DVD and CD direct-to-consumer club.

It made a tidy  €174 million profit last year by selling its US headquarters in Times Square.