Retail Goes Digital As Best Buy Gobbles Up Napster for $127M

During the chaos in the financial markets Monday, an M&A deal closed that had nothing to do with banks. Retailer Best Buy (BBY) is buying online music site Napster Inc (NAPS) for about $127 million in an all-cash deal ($121 million, plus unvested Napster stock options).

Best Buy is paying $2.65 per share--almost twice where Napster's stock ended the week last week--but it's still not a huge chunk of change for the retailer. And it's good news for Napster investors, getting a premium for the stock after reporting a $4.4 million loss last month.

With this acquisition, Best Buy is acquiring Napster's 700,000 subscribers who pay a flat monthly fee of $15 for unlimited access to its music service and it recently launched an iTunes-style download store. Best Buy had been offering a Best Buy Music Store, powered by Rhapsody technology (Rhapsody is owned by RealNetworks (RNWK)).

This is clearly a play to expand beyond the electronics business, at a time when the sector is sure to be slowed by the pullback in consumer spending. Best Buy is likely to bundle digital music, or access to it, with its mobile handsets or computers. Buy a cell phone, get a free subscription to Napster? That could be a way to lure consumers.

This is all part of the digital music wars. Apple (AAPL) clearly dominates the market; its iPods dominate 73 percent of the MP3 market. This field will only get more competitive. In October, Nokia (NOK) launches "Comes With Music" -- UK buyers with Nokia phones get unlimited song downloads for one year that never expire. And there are rumors circulating that Sony Ericsson might launch a mobile music store with an unlimited download plan.

Comments

[brando:]

This is NOT a good deal for Napster shareholders. Management cut a sweet deal for itself taking almost 10% of the total deal price in personal payouts in exchange for GIVING the company away at less than 0.4x revenue. This is a travesty and somebody needs to get the Feds involved. This kind of CEO theft from shareholders in exchange for value destruction and incompetance has to stop. Please do some diligence, discover the truth and modify your story.

2008 Sep 17 12:19 PM

[billddrummer:]

As has been mentioned elsewhere, with BBY the deal is a rounding error. For Napster shareholders, who would wait years for a premium like this one, it's a tainted win. Having the management take a 10% rake is probably excessive, but not unlike the platinum parachutes granted to the ex-CEOs of Merrill, Bear Stearns, Fannie, Freddie, Lehman and AIG.

2008 Sep 18 11:40 AM