Analysts Dismiss Possible RadioShack Sale, See Room for LBO

RadioShack’s stock hit a 52-week high Friday amid reports it was weighing a possible sale or leveraged buy out. Best Buy was said to be among the potential buyers. But analysts dismissed the possibility, arguing that such an acquisition would provide few benefits for Best Buy. RadioShack’s shares hit a 52-week high of $23.71 Friday morning before closing up 8.4 percent at $23.65.

The New York Post reported Friday that RadioShack was interested in merging with Best Buy or pursuing an LBO with an investor group. Earlier this month, Apollo Management also was said to be interested in buying RadioShack, but those reports proved unfounded. Best Buy and RadioShack officials declined to comment.

RadioShack had $900 million in cash as of Dec. 31, giving it many options besides a possible sale, analysts said. A share purchase appears to be the most likely scenario and an LBO is “somewhat likely,” said Anthony Chukumba, an analyst at BBT Capital Markets. A strategic sale, especially one involving Best Buy, is “extremely unlikely,” he said. In an LBO, private equity firms might be drawn to RadioShack’s strong brand name, Chukumba said.

Analysts we polled said Best Buy would have little to gain in buying RadioShack other than real estate to further expand its Best Buy Mobile format. Best Buy has 77 mobile stores, each measuring 1,100 to 1,200 square feet that it has developed with Carphone Warehouse. It plans to open another 75 to 100 Best Buy Mobile outlets in fiscal 2011, company officials have said (CED March 25 p1). RadioShack has 4,476 company-owned U.S. stores and another 1,308 franchised locations that average 2,504 square feet, according to the company’s 10-K. It also has 204 stores in Mexico operated by 10 franchisees that average 1,288 square feet. Best Buy opened its first store in 2008 in Mexico, has since added five other locations.

RadioShack has a growing wireless business that represented 38.2 percent of the chain’s $4.27 billion in 2009 revenue, up from 32.8 percent of $4.22 billion a year earlier. It signed an agreement last fall with Target to operate Bullseye Mobile Solutions cellular service kiosks in 100 stores and is expected to expand it to 800 locations by October. That’s short of the original goal for 1,700 stores. RadioShack has another 462 cellular service kiosks at Sam’s Club outlets. In February, RadioShack signed a new agreement with Sam’s Club, extending the contract through March 31, 2011. Under the new pact, RadioShack will this year assign operation of 22 kiosks to Sam’s Club, which took charge of 66 in 2009. The largest number of kiosks, which average 76 square feet, is in California where there are 108 locations, the company said. The number of RadioShack operated kiosks shrank to 562 from 688 a year earlier as it parted ways with Sprint Nextel. RadioShack forecast spending $100 to $120 million this year on capital projects, up from $81 million in 2009.

Best Buy already has a strong wireless business, which is expected to account for nine percent of total revenue this year, up from eight percent in 2009, Goldman Sachs analyst Matthew Fassler said. Best Buy’s wireless revenue is expected to increase 15 percent this year, against an industry average rise of a six percent, Fassler said. With smartphones driving the cellphone business, Best Buy will continue to gain market share, but at a “slower rate,” Fassler said. -- Mark Seavy

.