Blockbuster of a merger

Video giant Blockbuster Entertainment Corp. yesterday took its first step into music retailing, announcing an agreement to acquire the Music Plus and Sound Warehouse retailing chains from Roy E. Disney-owned Shamrock Holdings of Burbank for cash and stock worth approximately $ 185 million.

If the sale is closed as planned in mid-November, Blockbuster would become the largest music/video retailer in the United States, beating out such players as the 1,000-store, Minneapolis-based Musicland Group and 500-store, Albany, N.Y.-based Trans World chains. The merger could eventually change the landscape of music retailing.

“We view this as our first step into the music business,” said Greg Fairbanks , Blockbuster senior VP and chief financial officer. “We won’t go blindly into an acquisition or development plan, but we’re in this business to grow it. We will look for other opportunities.”

The move by Blockbuster also continues the consolidation of entertainment software retailers, which has seen several smaller chains swallowedby larger firms in recent years.

One retail analyst said that Blockbuster’s experience in rapid expansion and its strong cash reserves would make it a formidable player in the continuing battle to lock up key markets.

Music Plus boasts 91 stores, mostly in Southern California. Sound Warehouse has approximately 135 stores, spread through the Midwest and reaching into the Southeast. Florida-based Blockbuster has 2,989 stores worldwide, with approximately 1,000 of that total outside North America.

In a statement, Blockbuster chairman/CEO H. Wayne Huizenga said, “Sound Warehouse and Music Plus are strong platforms for our entry into the music retailing business because their retailing approach is very similar to the Blockbuster concept.”

Blockbuster will acquire the equity and pay off the outstanding indebtedness of the business using a combination of cash and shares of the company’s common stock, together having a value of approximately $ 185 million.

Based on recent closing sales prices, the company estimates that it would issue approximately 5 million shares of its common stock at the closing.

No management changes or layoffs will result from the sale.

However, Fairbanks said there was a “high likelihood” the company would seek to change the Sound Warehouse and Music Plus names “only so we can realize the (benefits) of cross-advertising and cross-promoting the stores. We could cross-promote with different names, but that could be confusing.”

Fairbanks said Blockbuster would be studying the music/video mix in its proposed acquisitions and its own stores.

‘A new concept’

While he refused to discuss the company’s plans, he said, “What we will try to do is bring a new concept to the music retailing business that changes it a little bit, but it will be analogous to what we did in video. There we brought in a new concept and grew pretty rapidly and created a different environment.”

Huizenga’s statement said the large size of the Music Plus/Sound Warehouse stores would “provide the company with the opportunity to add other complementary entertainment products to these stores, thus beginning development of our entertainment store of the future.”

Craig Bibb, an analyst with Paine-Webber in New York, said that both Sound Warehouse and Music Plus were “heavily leveraged and not particularly profitable. They’ve always been the dogs of the industry.”

Bibb predicted that Blockbuster would “totally revamp” the merchandising efforts at both chains, perhaps using the existing outlets as satellite stores for huge 30,000-square-foot superstores to be erected in certain markets.

A new breed

Blockbuster will “create a race of mega-stores,” Bibb predicted. “Tower, Virgin and HMV will all be trying to lock each other out of different markets.”

However, the saturated Southern California market will be an unlikely candidate for such a strategy, Bibb said.

Los Angeles competitors yesterday downplayed the significance of the Blockbuster threat.

Bruce Jesse, VP of advertising and sales promotion at the 305-store Wherehouse Entertainment combo store, said his company had “lots of questions” about what Blockbuster planned to do.

But, he said, “It’s fair to say that we don’t see it as having any impact on our strategies for growth.”

Also brushing off the acquisition was Russ Solomon, chairman of the 73-store Tower Records & Video chain, who said Blockbuster’s move “won’t affect us at all. They’re a fine company, but this just makes them a competitor, and they’re already a competitor. As they say in the trades, ho-hum.”

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