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Napster Hires UBS to Explore a Possible Sale

The online music service, which was bought by Roxio in 2002, has struggled to attract subscribers.

September 19, 2006|Dawn C. Chmielewski | Times Staff Writer

Napster Inc., which has struggled to find an audience despite being one of the best-known brands in online music, has hired an investment bank to explore a sale or strategic partnership.

The Los Angeles company said Monday that it had hired UBS Investment Bank to assist in evaluating its options.

"Our goal is to enhance shareholder value, which could potentially lead to a new strategic partnership or sale of the company," Napster Chairman and Chief Executive Chris Gorog said. "But in any event our primary focus will remain on growing Napster."

The company had arguably the most recognizable brand in online music in November 2002, when Roxio Inc. acquired the file-sharing pioneer's name and assets from U.S. Bankruptcy Court, where Napster had sought refuge from copyright infringement lawsuits.

But Napster 2.0 bore no resemblance to the original file-swapping service that had attracted an estimated 60 million people in its heyday in the late 1990s. Although Napster has raised $90 million from private sales of stock and $69 million from the sale of its Roxio software unit, it has had a difficult time attracting new subscribers.

The launch of an ad-supported free music service this year boosted traffic to the site by 50%, and Gorog told investors he hoped it would help the firm draw and retain subscribers.

C. Eugene Munster, an analyst with Piper Jaffray & Co., said that although the free service had increased traffic, it was too early to tell whether it would add subscribers.

Although Napster boosted revenue and subscribers in the quarter ended June 30, analyst Alan Davis of D.A. Davidson & Co. said Gorog had been frustrated with the company's anemic stock price, which fell 6 cents Monday to $3.55 before the announcement, then zoomed to $4 in after-hours trading.

The company faces intensified competition from Microsoft Corp., which plans to launch its Zune music player with a companion online music store this fall. The software giant joins two other competitors with deep pockets -- AOL and Yahoo Inc.

"A lot of things are heating up here," Davis said.

Napster Chief Financial Officer Nand Gangwani issued a statement that attempted to position Napster as a healthy company with $97 million in cash and annual sales of more than $100 million.

"For the second half of our fiscal year, we project a strong uptick in subscription growth from a base of more than half a million subscribers and a significant expansion of our mobile business, including the addition of new tier-one wireless partners," Gangwani said.

Napster's sales rose and its losses narrowed in its fiscal first quarter, which ended June 30. It reported a loss of $9.8 million on sales of $28.1 million, compared with a loss of $19.9 million on revenue of $21 million from a year earlier. As of June, it had 512,000 paying subscribers.

Munster said Napster was finding it tougher to compete.

"The brand has value today and it has global value, but unfortunately, the value is slowly being eroded away," he said. "And the company recognizes this."

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dawn.chmielewski@latimes.com

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