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Source Interlink/Primedia Deal Raises Red Flags Among Competitors



By
05/17/2007

Source Interlink emerged as the dark horse winning bidder for Primedia's enthusiast Media Division, announcing on Monday that it bought the 70-title group for $1.2 billion in cash. Source Interlink, controlled through Yucaipa Cos., the investment firm of Ron Burkle, is a major distributor of magazines, as well as other media products. But the deal raises questions from competitive publishers that naturally wonder whether Source Interlink will leverage its distribution power to favor its newly purchased magazines.

Indeed, that Source Interlink even won the auction was a surprise to some industry watchers. "It is a stunning development that a publicly owned distribution company controlled by Ron Burkle is buying one of the largest portfolios of enthusiast magazines," one source said Monday morning. "It's shocking. The valuation is significantly higher than they would have gotten from others."

Others seemed perplexed by the deal as well. After the announcement, Source Interlink's stock took a 15 percent dive.

Even so, Source Interlink is placing a high priority on publishing content. "Content creation and ownership is now among the highest priorities for Source, and it's a direction that we believe offers the greatest opportunity going forward," Source Interlink chairman Michael Duckworth stated.

Other publishers who compete in the special interest markets that the former Primedia titles target, however, are concerned, even though Source's model is not a new one. "What is happening at Source, in my opinion, is not unprecedented," says Linda Ruth, president of PSCS, a newsstand sales consulting company. "For example, you have Time Warner and COMAG that distribute client titles. So there are portions of what's happening at Source Interlink happening elsewhere in the industry."

Nevertheless, the purchase of these magazines by a company with the industry reach of Source Interlink is a cause of concern to competitive publishers, who are wondering if the newly purchased titles will receive preferential treatment throughout the distribution chain. But there is also another issue at stake.

In addition to the Primedia purchase, Source inked an agreement on May 7th to be the exclusive distributor to the Borders Book store chain, meaning that ultimately, when existing contracts with other distributors;primarily Ingram, which has been a distributor to the Borders chain;expire, publishers will most likely be forced to sign on with Source in one way or another if they want to sell magazines in the Borders stores.

So now, beyond the worries of individual publishers, newsstand sales managers throughout the industry are beginning to ask how any company that owns control of the newsstand supply chain all the way from product to final distribution and checkout sales can possibly be impartial in its dealings with its publishing customers.

"The exclusive with Borders is with such a significant chain and the fact that there's already been grumblings from publishers that Source is using it to leverage higher distribution fees, for example, is a concern. There's just a lot of power consolidated into one company," says Ruth.

For some circ directors, who prefer not to be quoted officially at this time, the situation is reminiscent of circumstances that led to the Robinson-Patman Antitrust legislation of 1936.

By
05/17/2007







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