That Sweet Deal Turned Sour -- Fast

Coinstar (Nasdaq: CSTR  ) just closed the acquisition of NCR's (NYSE: NCR  ) video kiosk business. The buyout includes the Blockbuster Express line of kiosks, including a license from DISH Network (Nasdaq: DISH  ) to use the name. All this for the paltry sum of $100 million. As fellow Fool Rick Munarriz put it when the agreement was signed: "Coinstar just wiped out its only material competitor on the DVD kiosk front. Boom. Well-played, Coinstar."

It's a deal, it's a steal -- it's the sale of the century, to paraphrase Tom from Lock, Stock and Two Smoking Barrels. Except, maybe it wasn't such a brilliant buy after all.

You see, Coinstar never told us what it expected to get out of NCR's assets -- and now that we know, it's bad news.

The deal is now supposed to be profitable "sometime in 2013," but the 2012 fiscal year takes an earnings haircut of $0.50 per share. There's also a $45 million capital expense bill to pay for getting the blue Blockbuster kiosks decked out in Redbox crimson or replaced altogether.

So that's a near-term direct cost of about $60 million on top of the $100 million sticker price, and Coinstar also shouldered some undisclosed liabilities along with all these assets. We don't have all the numbers yet, but the deal doesn't look all that cheap anymore. This comes close to wiping out a full year of Coinstar's free cash flow.

Maybe that's why Netflix (Nasdaq: NFLX  ) didn't bother placing a bid on NCR's DVD kiosks, despite the potential value Rick saw in that idea. Something like $200 million is better spent on international expansion and fresh streaming content licenses than on rejuvenating a dying DVD business.

On that note, Coinstar had better turn a profit on the Blockbuster brand right quick because the company is investing in a fading platform. You think VHS tapes went out of style quickly when DVDs arrived? Digital video has a ridiculous head start because Blu-ray players, connected TV sets, and video game consoles already provide all the living room hardware you need -- no need to invest in a new player this time. Plastic discs will be forgotten before you know it, and I hope Coinstar has a Plan B for Redbox. To borrow a term from our Rule Breakers team, the current Redbox model seems as crushable as a marshmallow Peep.

Despite an aftermarket plunge, Coinstar's shares have still soared more than 40% so far in 2012. That's impressive, but Foolish analysts have found a much stronger stock for the rest of the year. Learn all about The Motley Fool's Top Stock for 2012 in a special report -- free for a limited time by clicking here.

Fool contributor AndersBylund owns shares in Netflix and has also created a bull call spread position on that stock. He holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of Netflix and Coinstar. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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