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Best Buy Acquires Napster in $121 Million All-Cash Deal

The consumer music-delivery landscape continues to shift. On September 15, consumer electronics retailer Best Buy announced its acquisition of music subscription service Napster for $121 million as part of Best Buy’s effort to compete with Apple’s iTunes music service. The all-cash deal values Napster at $2.65 per share. According to CNET News, “The acquisition, Best Buy contends, will give it extra oomph in dealing with record labels, movie studios and hardware makers.”

As reported in Digital Music News, the buyout gives Best Buy a digital store to complement its hardware footprint. “We can foresee Napster acting as a platform for accelerating our growth in the emerging industry of digital entertainment, beyond music subscriptions,” said Dave Morrish, executive vice president at Best Buy.

The per-share valuation essentially doubles the price from Friday, part of a relatively unenthusiastic response from Wall Street. Napster board members approved the move, though the exit appears more of a relief than a bonanza. The purchase includes Napster’s cash holdings of $67 million, an account that has been eroding over the past few years. Currently, Napster carries a subscriber base of roughly 700,000, and the company now offers MP3s on the download side.

At the bell on Friday, shares closed at $1.36, and shares bumped upward to $2.52 on Monday. NAPS has dropped nearly 57 percent over the past year, and nearly 62 percent over the past two years. Napster lost $16.5 million on revenues of $127.5 million for the fiscal year ending March 31st. The deal is expected to close during the current quarter.

More Acquisition Details
Best Buy emerged as the surprise buyer of Napster on Monday, though the subscription service has been seeking an acquisition for some time. UBS Investment Bank was the exclusive financial representative for Napster, and Best Buy completed the deal using available cash. Subtracting a $67 million Napster cash balance, the net price tag was $54 million for Best Buy.

The buyout was unanimously approved by the Napster Board of Directors, and cools a recent revolt by a small group of shareholders. Napster will enter the Best Buy fold as a wholly-owned subsidiary, according to paperwork filed with the U.S. Securities & Exchange Commission (SEC). Best Buy is not planning to relocate Napster from its Los Angeles headquarters, or stage serious personnel changes, though the company is undoubtedly leaving its options open.

Best Buy, a Minneapolis-based consumer electronics giant, will retain the current Napster leadership. That includes Chairman and CEO Chris Gorog, President Brad Duea, and Chief Operating Officer Christopher Allen. The refreshed contracts will extend through March 3, 2012, and outline respective base salaries of $400,000, $315,000 and $315,000. Performance-based bonus packages – including some guarantees for Gorog – are also being layered into those agreements, as well as options grants in Best Buy (BBY) stock.

Further news coverage is available from the New York Times and Associated Press.

In addition, analysis of this transaction and its potential impact on the music industry can be found in the New York Times, London Times Online, Ars Technica andInside Music Media blog.