Tabloid Trouble American Media needs more than Bonnie Fuller to turn itself around.
By Devin Leonard

(FORTUNE Magazine) – David Pecker is masterful at generating buzz. The American Media CEO created a torrent of it recently when he hired US Weekly's Bonnie Fuller to be chief editorial director of his tabloid empire, which includes the National Enquirer, the Weekly World News, and Star magazine. Fuller's first task will be to investigate turning Star into a glossy that will steal readers from US Weekly, In Touch Weekly, and People (which, like FORTUNE, is owned by AOL Time Warner).

Fuller is part of Pecker's larger plan to transform American Media into a more respectable company, one that he can take public within 18 months. (American Media is controlled by private-equity firms that would no doubt like a quick return on their investments.) But from the looks of it, Pecker has a ways to go. Four years after taking over American Media in a leveraged buyout, Pecker has yet to sort out some underlying problems at his company.

The biggest issue is declining circulation. Last year single-copy sales of the company's tabloids tumbled 6.9%. That hurts American Media more than other publishers because 79% of its revenue comes from circulation. Pecker has raised cover prices and tried to sell more expensive advertising; last year ad revenue for the American Media titles was up $1.7 million, but circulation revenue fell $3.5 million.

Hence the move into more upscale magazines. In January, Pecker bought Weider Publications--owner of Shape, Men's Fitness, and Muscle & Fitness--for $357.3 million. While the acquisition boosted American's earnings and ad revenues, it also raised questions. Why did Pecker pay 13 times cash flow for a company that lost $18 million last year and wasn't growing terribly fast? The deal increased American's total debt to $1 billion, which has some bond analysts nervous.

Weider is part of Pecker's grand strategy, which is to increase circulation through American's distribution system. He says the company controls 70% of the "pockets" in checkout areas of supermarkets and other outlets (no independent source tracks the number). Even with that reach, however, it's not clear that selling new assets at checkout counters will pay off. "How the hell do you sell Natural Health on a rack with all that garbage?" wonders magazine consultant Martin Walker. Pecker says he plans to reposition Natural Health for a broader audience and also plans to give Men's Fitness a face-lift. To promote his new assets without cannibalizing his tabloids, he'll have to shell out even more cash: Pecker estimates that it will cost as much as $4 million to buy 200,000 distribution points for the two magazines. He says he's still shopping for more magazines, which would mean less dependence on the tabloids for cash flow. But it also might create more bottlenecks in American Media's distribution system. Looks as if Fuller doesn't have the toughest job in the magazine world--her boss does. --Devin Leonard