Alliance Entertainment Corp., which is owned by the Yucaipa Cos., and magazine wholesaler the Source Interlink Cos. are involved in merger negotiations that would create a company with about $1.5 bill

Alliance Entertainment Corp., which is owned by the Yucaipa Cos., and magazine wholesaler the Source Interlink Cos. are involved in merger negotiations that would create a company with about $1.5 billion in annual revenues, sources say.

Source Interlink, a publicly traded company with the symbol SORC, reported $4.1 million in net income on sales of $91.4 million in its fiscal quarter ended July 31. This compared with $3 million in net income on sales of $85.5 million in the corresponding period last year. The company's stock closed Nov. 9 at $10.77, giving it a market capitalization of $252.3 million.

Source Interlink's 10-K filing suggests that it would be a good fit with AEC, as its main customers are chains such as Barnes & Noble, Borders, Musicland Group and Virgin Megastores. It also manages point-of-purchase displays at supermarkets, discount stores, drugstores, convenience stores, terminals and newsstands, including Food Lion, Kroger, Target, Walgreens and Winn-Dixie.

In total, Bonita Springs, Fla.,-based Source Interlink provides fulfillment and marketing services to more than 2,500 retail companies that collectively operate about 80,000 stores, according to its SEC filing.

Coral Springs, Fla.-based AEC also sells to music and book chains, as well as supermarkets through its Fresh Picks division.

In addition to being a good match, a merger would provide an exit strategy for Yucaipa, which has owned AEC since it emerged from Chapter 11 in 1999. A previous attempt at a merger between AEC and a publicly traded company, Liquid Audio, fell through.

In an apparently unrelated move, Yucaipa is said to be considering bidding on Tower Records, as previously reported.

AEC and Yucaipa didn't return calls for comment; a Source Interlink spokesman said the company does not comment on market rumors.