In a quest to turn two laggards into one winner, CompUSA will buy consumer electronics retailer Good Guys (NASDAQ:GGUY) for $55 million. This is one of a series of recent moves by Carlos Slim, majority owner of privately held CompUSA and the richest man in Latin America.
Slim amassed an empire by turning around struggling businesses -- buying assets for peanuts, putting in top-notch management, and squeezing out profits. His holdings span tobacco to copper mines to printing operations and include a big slug of equity in the Mexican phone company, Telmex.
In 2000, it looked like Slim's Midas touch was intact when he purchased struggling computer and electronics retailer CompUSA for a song: $889 million.
Or was it? Even billionaires stumble (and those tend to be big ones). Retail has undergone a revolution driven by such giants as Wal-Mart (NYSE:WMT) and online e-tailers such as Amazon.com (NASDAQ:AMZN). It's become a game of scale; the more stores you have, the more pricing power you bring to bear on pesky suppliers. But in the land of giants, CompUSA is a peon, with a mere 226 stores. To have the same edge as a mega-retailer, CompUSA needs 700 or even 800.
For CompUSA and Slim, that means going on a shopping spree. In June, Slim disclosed that he owned 9.2% of Circuit City (NYSE:CC) and made a $1.66 billion offer for the rest. The knee-jerk reaction from Circuit City management: No way.
Like any good turnaround expert, Slim held his ground on valuation (although the offer is still on the table). Then, last Monday, he announced a $2.05 per share offer for Good Guys. In all, the $55 million deal represents a 37% premium to Friday's close of $1.50.
The deal, which should be final in a few months, adds 71 stores and $750 million in revenues -- not nearly enough to get to 700 or 800 stores. More importantly, Good Guys on Monday reported a second-quarter net loss of $6.9 million on declining margins (26.8% from 28.6% the same period a year ago). Comparable-store sales likewise decreased 13% for the period. Good Guys has generated a profit in only one of the last eight years.
Let's face it, even the most savvy turnaround artist would have sleepless nights with this acquisition. What's the rationale? It's the same for many ill-fated acquisitions. Comments from the company include: "convergence strategy of computers and entertainment," the offering of "seamless technology solutions," and oh, yes, "long-term growth plan."
Blah, blah, blah. What Slim really needs is scale, and that means buying such big players as Circuit City or Best Buy. But he's a value investor and probably won't be thrilled paying too high a price. So, instead, he's employing the Hewlett-Packard (NYSE:HPQ) model.
Does Slim really buy the notion that combining two laggards somehow gets you one strong company? Good Guys, bad idea.
Tom Taulli is the author of six books on investing, such as the StreetSmart Guide to Short Selling (McGraw-Hill), and is a professor of finance at the USC School of Business (don't worry, he does come out of his ivory tower). You can reach him at[email protected].
