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Best Buy adopts Napster

The retailer agrees to buy the faltering L.A. digital music company for $121 million.

September 16, 2008|Michelle Quinn | Times Staff Writer

SAN FRANCISCO — Ending its long search for a corporate parent, Napster Inc. said Monday that it had agreed to be acquired by electronics retailer Best Buy Co. for $121 million.

The purchase price of $2.65 a share marked a nearly 100% premium over the Los Angeles-based digital music company's trading price, which has hovered around $1.30 in recent weeks. Napster has struggled to find a winning business model in the uncertain world of digital music, which Apple Inc. dominates with its iTunes store.

Minneapolis-based Best Buy said Napster would remain in Los Angeles with its current management team, led by Chief Executive Chris Gorog. The retailer said it bought the 140-employee company to bolster its digital supply chain, saying it planned to use Napster's technology and services to sell not just music but also videos, games and photographs.

"With Napster, Best Buy is trying to bridge the gap between physical and digital distribution as the physical slows down," said Michael Olson, an analyst with Piper Jaffray.

The news of the acquisition came as Napster shareholders were preparing to gather in Los Angeles on Thursday for what promised to be a contentious annual meeting. Three shareholders who said they wanted the company to look aggressively for a buyer had banded together to go after board seats.

But news of the deal, which is expected to close in the fourth quarter, prompted Napster to cancel the meeting. Gorog called the acquisition "very beneficial to our shareholders."

Best Buy said it had begun negotiating with Napster six months ago, before the dissident shareholders took their first steps. The investors' efforts did not affect talks or the timing of the deal, both companies said. "We're waiting to review the documents before commenting," said a source close to the dissidents.

Napster, which was previously named Roxio and bought its name from the defunct file-sharing network, has more than 700,000 subscribers who pay $13 a month to listen to a library of more than 6 million songs.

It also offers a free music streaming service called FreeNapster, which is advertising-supported. And in May, it opened its digital music store, which sells songs that don't have copyright protection.

The company recently posted a quarterly loss and said its subscriber base shrank to 703,000 from 760,000. Revenue fell 6% to $30.3 million.

Best Buy, the top U.S. electronics retail chain, has been on a mission to revamp its 970 stores so that customers have a wider selection of products and services -- as well as more guidance on how to set up their digital lives, said Dave Morrish, executive vice president of connected digital solutions at Best Buy.

Best Buy "will try to cross-sell the service with devices that are sold at Best Buy," Olson said. "That is more powerful than what Napster has been able to do on its own."

One of the winners from the acquisition could be the recording industry, which may see more sales if Best Buy becomes a bigger promoter of digital music. Gorog said the head of a major record label told him that the announcement of the Napster acquisition prompted the label to boost its sales forecast Monday.

"Everyone in the industry sees very plainly how this can create a more significant player in this exciting space," Gorog said.

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michelle.quinn@latimes.com

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