Super D's Acquisition of Alliance Entertainment In Context

In a minnow-swallowing-a-whale-like deal, Super D has acquired Alliance Entertainment in a move that will make it the fourth-largest U.S. music account behind iTunes, Amazon, and Anderson Merchandisers, which racks Walmart and Best Buy.

Super D, based in Irvine, Calif., has revenues of about $195 million, sources say, and Alliance Entertainment, based in Coral Springs, Fla., has revenues of about $725 million, which also makes the merged company the second largest wholesale with combined revenues of about $920 million,  behind Anderson Merchandisers. By Billboard's estimation, the newly company will now have 6.64% market share in the U.S., behind iTunes 40.6%, Anderson’s 12.2% and Amazon’s 8.6% shares.  Previously Alliance Entertainment  was ranked No. 5 and Super D was ranked No. 11., but the merger will move them past the previous No. 4, Target, which had 5.48% market share in 2012.

Super D Acquires Alliance Entertainment, Creating Second Largest US Music Wholesaler (Sources)

"Combining the best of both Alliance Entertainment and Super D into the world's largest wholesaler of music and video with our continued focus on service, selection, and technology creates enormous possibilities for the company as we approach $1 billion in annual sales," said Super D president Jeff Walker in a statement

The claim of being the largest wholesaler ignores that Anderson Merchandisers sells more music and video. But Anderson Merchandisers is a specialized kind-of-wholesaler known as a rackjobber, which carries a small assortment of maybe tens of thousands of music and video titles, which it racks to Walmart and Best Buy and is responsible for the profitability of those product lines in each individual store. 

Meanwhile, the merged Super D and Alliance offers all kinds of wholesale functions: one-stopping, which carries quite possibly the widest assortment of music and video titles, nearly a half a million titles ,which it sells through its one-stop business that supplies music and video to independent retailers; fill-in and specialized deep catalog inventry to  large chains like Target, when their primary vendors, the music and video labels, run out of their own product; rackjobbing accounts like Barnes & Noble and Kmart; serving as independent distributors, each carrying specific indie label lines that can only be acquired from Super D or Alliance Entertainment; and the largest online CD and DVD fulfillment service for such stores as Amazon.com, Wal-Mart.com, Target.com and BestBuy.com, as well as hundreds of other online stores selling CDs and DVDs on the internet.

In addition, Super D also owns and operates some of the largest online CD and DVD stores, including deepdiscount.com and DVDplanet.com.

Alliance Entertainment manages a physical inventory of 400,000 CD, DVD and Blu-Ray titles in its state-of-the-art 662,000 square foot distribution center in Shepherdsville, KY. The company has 2,900 unique customers and ships to 14,500 locations throughout the United States.  Super D also has a wide assortment of inventory carrying hundreds of thousands of CD and DVD titles.

Platinum Equity and the Gores Group, the two private equity firms that acquired Alliance Entertainment in 2010 from SourceInterlink for what source say was $85 million, also put out a statement saying it had sold the wholesaler.

"We are proud of what we accomplished with Alliance Entertainment over the past three years," said Johnny Lopez, partner at PlatinumEquity. "We achieved our goals, helping the business thrive as it has continued navigating the evolving market for media distribution. Earnings improved each year under our ownership and the company madestrong gains in home entertainment, e-commerce and licensing."

During that time, Alliance completed two strategic add-on acquisitions, buying the Edge Entertainment Distribution in March 2011 and Audiolife in May 2012, Platinum and Gores pointed out.

While terms of the deal were not disclosed, Billboard estimates that Super D paid somewhere in the range of $85 million and $125 million. The $85 million represents the amount that Platinum Equity and the Gores Group paid for Alliance while the higher range represents a Billboard guesstimate that Super D paid three-times earnings before interest, taxes depreciation and amortization, which was $39 million in 2011 and projected to be $45 million in 2012, according to what sources told Billboard when Alliance was up for sale (Dec. 1, 2012 -- if you split the difference between $39 and $45 million, it comes to $42 million times three, which equals $126 million.)

In the past, wholesalers would command a multiple of at least four times EBITDA, but with physical on the decline and its future in question, a three-time multiple seems like a safer bet, and maybe a bit high.

Super D was advised in the deal  by KPMG corporate finance managing director Rick Chance, and apparently dealt directly with the sellers. An earlier effort to sell the company last year led by the investment banking arm of Guggenheim Partners, which also owns Billboard parent Prometheus Global Media, apparently failed to achieve the price the sellers were looking for.

The deal closed Wednesday afternoon (Sept. 4) and Super D principals Bruce Ogilvie and Walker were conducting conference calls into last evening, alerting retailers and vendors of the deal, sources say.

Ironically, the Alliance acquisition brings Ogilvie's business life to full circle. Back in the early 1990's, the executive sold his Abbey Road One-Stop business for about $35 million to the architects that were building Alliance Entertainment through a roll-up of wholesaler acquisitions. Other wholesalers that were acquired to forge Alliance Entertainment include Bassin Distributors, CD One-Stop, Encore Distribution and INDI.