Source Interlink Buys Primedia’s Enthusiast Group for $1.1779 Billion–Too Much?

The facts: Source Interlink has agreed to buy Primedia’s enthusiast division for almost $1.2 billion; KKR has a 60% stake in the business. Industry sources speculated that the 70-odd magazines and ancillary properties would (should?) go for around $800-900 million. The reported asking price was “around $1 billion”. And one source speculated that they heard that the next highest bidder was close to $800 million.

So what gives with this hefty price tag? Why would Source outbid the next highest bidder by a mile?

The dish: Many insiders have privately conveyed to me that they think the company has been overvalued and that Source Interlink is going to have to work very hard to make up the $300-400 million through taking costs out of distribution and fulfillment (their core competency) and by boosting newsstand sales through their powerful market position. Only time will tell if they can do this…to the tune of several hundred million. Remember, they’re not trying to break even on this deal.

On the other hand, some insiders welcomed Ron Burkle (ultimate new owner of PMG) putting this amount of money into the industry–they’ve taken it as a sign of health.

Tad Smith, CEO of Reed, and an admittedly interested acquisitor, has remarked that “it’s very expensive out there. There’s a lot of money chasing some very high quality deals.” He added that, “we’re going to be very, very careful.”