Retailer to acquire online music-sharing site

Best Buy has picked up beleaguered Napster for $121 million in a bid to beef up its digital coin.

Deal, the latest indication of how difficult it is for digital music companies to compete against Apple on their own, is expected to close during the fourth quarter. Acquisition cost Best Buy $54 million net, once Napster’s $67 million cash and short-term investments are factored into the transaction.

Napster, which ignited the digital music craze in its original incarnation as a peer-to-peer file-sharing network, has struggled to survive as a vendor of legal downloads. It has been seeking a buyer for some time, and recently hired UBS to facilitate a sale.

Netco filed SEC documents outlining the purchase on Sunday. Deal valued shares at $2.65, nearly double Friday’s closing price of $1.36.

Acquisition includes Napster’s approximately 700,000 subscribers, its Web-based customer service platform and mobile capabilities. Best Buy said it envisions Napster acting as a platform to accelerate digital entertainment growth, beyond music subscriptions.

This strategy — buying existing technology rather than building it — is similar to the path chosen by Blockbuster when it acquired Movielink, a movie download site originally developed by the major studios. Blockbuster recently explored a purchase of Circuit City to further link digital devices and downloads, but abandoned it due to concerns about the electronics chain’s finances.

Napster began selling MP3 downloads in May in an attempt to compete against Apple’s iTunes juggernaut, but failed to gain much traction. Rhapsody, the joint venture between RealNetworks and MTV, soon followed suit, but has also struggled. Amazon also sells music downloads, but that is a small part of the Netco’s business.

Deal carries a $3 million termination fee for Napster if it falls through. CEO Chris Gorog, prexy Brad Duea and chief operating officer Chris Allen have signed new contracts to stay with Best Buy through March 3, 2012. According to the SEC filing, their salaries will be $400,000, $315,000 and $315,000, respectively. They also will be eligible for various options; Gorog will receive a $1.575 million grant in Best Buy shares.

Napster has approximately 140 employees, with headquarters in Los Angeles. Best Buy said it does not plan to relocate Napster or to make significant changes in personnel. The transaction has been unanimously approved by Napster’s board of directors.

Netco posted a loss of $16.5 million for its fiscal 2008, an improvement over its $36.8 million loss the previous year. Revenue rose 15% to $127.5 million for the year.

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