The consumer electronics retailer is buying music and video chain Musicland. Best Buy hopes to expand its customer base and sales channel by putting some of its products into Musicland's stores. Best Buy's been struggling lately with slow sales and tightening margins. It's not shocking that the company is searching for new opportunities. As for the Musicland deal, however, investors are skeptical.
 |
|
|||||
|
||||||
|
||||||
By
Consumer electronics retailer Best Buy (NYSE: BBY) is doing a little holiday shopping. The company announced plans this morning to buy music and video retail chain Musicland (NYSE: MLG) for $12.55 a share. Investors aren't welcoming the deal, bidding Best Buy shares down today by around 18% -- near a new 52-week low. The shares were already smacked a couple of weeks ago on the company's earnings guidance for the last half of its fiscal year. Deal details It's not surprising that Best Buy is looking for new opportunities for growth as competition heats up and sales slow at its own stores. The company plans to expand the offerings in the Musicland stores by adding products such as MP3 players to the line-up. Best Buy will get access to many customers that have been out of its reach until now, such as rural customers and mall shoppers. The opportunity could pay off for the retailer if it can efficiently capitalize in a market that is seeing increased competition on the consumer electronics front from discount retailers such as Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST), and Target (NYSE: TGT). For Musicland, what a deal. The company's shares have traded between $5.88 and $10.25 all year. Shares doubled in the past week to their current $12 level. Musicland, like Best Buy, has been facing competition from discounters and online stores such as Amazon.com (Nasdaq: AMZN) as well as dealing with the proliferation of file-swapping services like Napster. Earnings impact The edge in this deal should probably be given to Musicland for securing a great price for itself. It remains to be seen now if Best Buy can really do the things it hopes to do with Musicland's stores. Selling CDs and videos isn't exactly a high-margin business: Musicland's net margins are around 3%. Best Buy's main hope will be adding the consumer electronics and digital products to Musicland's stores. Right now, investors seem skeptical.
Best Buy will spend around $485 million for Musicland, assuming $260 million in debt. The deal is expected to be completed in the first calendar quarter of 2001. Musicland operates about 1,300 stores in 49 states under the Sam Goody, Suncoast, Media Play, and On Cue names. The company had revenues in 1999 of $1.89 billion, translating into net income of $58.4 million.
Best Buy's earnings will be hurt by the acquisition over the next year, which isn't surprising. The company sees fourth-quarter earnings being diluted by $0.05, and dilution of $0.20-$0.25 over the first three quarters of next year. The Musicland purchase will start returning earnings value in the fourth quarter with accretion of $0.20-$0.25.
RSS Headlines
Fool UK
