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Stock Analyst Update

Best Buy's Shopping Spree Makes Sense, in Theory

Musicland acquisition is exciting, but raises some worrisome issues.

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What Happened?
Big-box electronics retailer Best Buy (BBY) announced Thursday morning that it is acquiring mall-based retailer Musicland (MLG). Musicland operates about 1,300 stores under the Musicland, Sam Goody, On Cue, and Media Play brand names. The all-cash acquisition of $12.55 per share--a 22% premium over Musicland's Wednesday close--will be dilutive to Best Buy's earnings for the next four quarters. Best Buy also agreed to assume $260 million in debt as a result of the transaction. In midday trading, the company's stock was down more than 15%, to around $24.

What It Means for Investors
We think the acquisition makes sense overall. Best Buy is acquiring Musicland when the latter firm's stock was trading at just 6 times Zacks 2001 consensus earnings estimates. It expects to gain synergies by remerchandising Musicland's stores to focus less on CDs and more on software and electronic items such as MP3 players and cell phones. Also, thanks to Musicland's mall locations, Best Buy will now be able to reach more teens, women, and rural consumers. And Best Buy's excellent management team should be able to reinvigorate Musicland's flagging operations.

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.