The Reorganization of Source Interlink

How Source battled back from industry pariah and financial chaos to an amicable, if wary, supply chain dynamic.

By Chandra Johnson-Greene
Monday, June 1, 2009

The year 2009 has been a tumultuous one for Source Interlink to say the least. In mid-January, the publishing and distribution company followed Anderson News—together representing approximately 50 percent of the distribution market—in introducing a 7-cent surcharge on all magazine copies shipped, throwing publishers for a loop and driving the entire distribution system to the brink of disaster.

When publishers tried to fight back by refusing to comply with the pricing structure—Time Inc. was the first to protest followed by Curtis, AMI, Bauer and Hachette—Source called their bluff and filed a restraining order, which prohibited publishers and national distributors from denying shipments to Source’s magazine distribution business. An anti-trust lawsuit followed, which alleged that the defendants “conspired” to force the company to sell its distribution business at a steep discount to rivals Hudson News and News Group.

By April, Source settled with almost all defendants, which included News Group, Time Inc., Time Warner Retail, American Media Inc. and its distribution unit Distribution Services Inc., Bauer, Curtis, Hachette, Hudson News and Kable Distribution. (Bauer remains the only defendant not to strike a deal with Source.)

Later that month, Source announced that is was filing for bankruptcy and going private, eliminating approximately $1.9 billion of existing debt against assets of about $2.4 billion. Its top 30 unsecured claims total about $733 million and includes the country’s biggest publishers and national distributors.

“It’s a very unusual bankruptcy,” Cynthia Beauchamp, group VP, human resources and labor relations, Source Interlink, told AD. “We negotiated with our major creditors before we filed and we got assurance that our credit terms were going to be the same as long as we paid them. Going into bankruptcy this way meant that none of our creditors were going to get a discounted amount of the money that we owe them. We were able to go into the court and say that we wanted to [continue to] pay our employees and vendors, and the court gave us permission to do that.”

She added that the bankruptcy and privatization of the company was in no way related to the discord that occurred on the distribution side of their business, but rather to the decline in advertising for the 70 print titles it acquired from Primedia two years ago.

Newsstand consultant Baird Davis, however, says that there may be some cause for concern. “They provide a service to publishers, but they’re also a publisher themselves,” he says. “Now that [former Source consumer marketing president] Steve Astor has left the company, I’m not sure what they’re going to do. They may try to unload their publications when the time is convenient.”

But Beauchamp says that for now everything will be business as usual. “We’ll move forward,” she says. “We’re going to maintain the management that’s here, which is good news for our customers and vendors. Most people will not see any difference in structure from a legal standpoint.”

The biggest question, however, may be how the overall relationship between the publishers, wholesalers and Source has changed. Will the actions from the beginning of ’09 forever change the way the three parties do business with each other?

Beauchamp doesn’t think so. “We’ve worked through all of those issues,” she says. “We came to an agreement, so now we have good, solid relationships with them. Our major players were very supportive before we went to [bankruptcy] court and they’ve assured us that they want to do business with us.”

Davis says that how publishers feel about Source now is somewhat irrelevant. “I don’t think the major guys like Curtis, Time and Comag have any interest of putting Source out of business,” he says. “I think they realize that there aren’t too many alternatives. We’ve already lost Anderson—they don’t want to get to a point where there are only two [wholesalers] left.”

Publishers and distributors have to be vigilant though, Davis adds, since Source is in the position where they’ll have to reduce costs. “When companies are as strapped as the Source is for money and business, service is not going to get better, but worse. [Publishers] have to be concerned about the level of service.”