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HEARD ON THE STREET: Deal or No Deal? That's the Issue For a Magazine and DVD Powerhouse
Summary: Source Interlink Cos. (SORC), the largest US distributor of magazines and a major distributor of CDs and DVDs, could be acquired for 20% more than its current stock price by private equity funds. Its operating profit margins have slipped in recent quarters from 5-7% to less then 4% after a spate of acquisitions, but a small increase in profitability due to cost cutting could make a big impact on the bottom line given that the company's revenue will be almost $2 billion this year. Interlink distributes CDs and DVDs to offline retailers and the majority of online retailers, including Amazon. Bookstores Barnes & Noble and Borders accounted for over 50% of 2005 revenue. CEO Leslie Flegel has stated that he expects margins to improve due to cost cutting. Each added half point in operating margin adds $0.12 in EPS. The stock trades at 12x 2007 estimated EPS versus an average of 19 over the last five years. Interlink announced in March that it had hired Deutsche Bank to look at "strategic alternatives". Analysts think the company could be sold for $13.50-18 per share over the next couple of months. Over 40% of the stock is sold short.