Source Interlink tries to buy a bit of enthusiasm

by Daysha Taylor, May 24th, 2007, 7:00 am

Source Interlink, a distributor of magazines, CDs, and DVDs, has announced [PDF] plans to acquire PRIMEDIA’s Enthusiast Media (EM) division for about $1.2 billion. The acquisition includes more than 70 specialty publications (including Hot Rod, Lowrider, Powder, Surfer, Soap Opera Digest, and Motor Trend) as well as about 90 Web site properties and more than 65 events.

Source Interlink estimates that it can generate about $2.4 billion in annual revenue by combining EM with its current media offerings, according to a press release. The company’s distribution channels include major bookstore chains like Barnes & Noble and Borders and retailers like Wal-Mart and Best Buy. While Source Interlink is capable of securing rack space in the largest retail locations in the US, I wonder if mainstream outlets are the best place to drive sales of specialty publications?

The problem with the specialty publication market is that a narrow focus on publication topics drastically decreases the number of potential readers and reduces the number of interested advertisers to a fraction of what a mainstream magazine would attract. PRIMEDIA’s original attempt to consolidate the fragmented industry ultimately resulted in its need to sell EM to pay off about $1.5 billion in debt. It took five years for PRIMEDIA to recover from its mistakes. I guess that, where PRIMEDIA has failed, Source Interlink feels it can succeed.

I would feel better if Source had strong ties to automotive parts retailers like Pep Boys or Autozone, or if the company were in bed with specialty sporting goods outlets that sell skis, surfboards, or canoes. It only make sense to sell auto magazines in the places where consumers shop for auto parts or ski magazines near the slopes. Soap Opera Digest will likely thrive as Source Interlink expands the title’s availability at grocery stores, but I doubt that it will generate the cash flow needed to pay back the $1.2 billion the company is borrowing from Citigroup Global Markets to fund the acquisition.