Will Market Forces Turn Music Retail Deals Into Winners?21 Sep, 2003 By: Kurt Indvik
Sometimes in business the best thing to do is when everyone zigs, you zag.
Call me a little crazy if you want, but you have to wonder if maybe the music retailing business hasn't hit bottom, and the acquisition of struggling music/video chains such as Musicland and, this week, Wherehouse Entertainment and CD World (see our cover story in this week's issue of Video Store Magazine) at bargain-basement prices is going to turn out to be a very prescient thing to have done. Is Tower, also fishing for a suitor, next?
For as much as the file-sharing of music seems to have undone the music industry, the combination of a variety of market forces may — just may — bring music buyers back to these music/video chains and regain at least a portion of the magic that has kept them at the center of home entertainment retailing for decades. Meanwhile, these chains and anyone else retailing home entertainment software have to be busily, and continuously, transforming themselves as digital entertainment software brings the spectrum of entertainment media eve r closer together.
I am not privy to the details of recent transactions, but Sun Capital picked up 1,100-store chain Musicland in an all-stock deal that included assumption of liabilities, and that struck a fairly resounding note that the valuation of music chains had reached epic lows. Just last week, Trans World Entertainment picked up Wherehouse Entertainment's 148 stores for a reported $41 million total consideration that includes cash and assumed liabilities. On the face of it, those look like pretty rock-bottom deals for what have been major franchises in a multibillion-dollar industry.
Musicland had been draining money from Best Buy since it acquired full ownership of the company in January 2001, and Wherehouse had assets of $228 million against $222.5 million in debts when it filed for bankruptcy at the beginning of this year. Meanwhile, Tower lost $13.8 million in its most recent quarter. So there is no arguing that the picture is not pretty for these companies. But as the old saying goes, there has to be a puppy somewhere under that large pile of bad financial news.
Recently, things have been moving in a direction that could help these chains. Most importantly, Universal Music Group will dramatically cut the price of its CDs to a range that makes it a reasonably priced entertainment product. There has been a growing chorus within the industry to bring back the single, and scuttlebutt is that its return is not far away. The music industry is recognizing the growing interest of DVD music, and embracing both DVD music and DVD-Audio, along with exploring the so-called flip-disc CD/DVD-Audio combo. Add to this the continued and growing role of music stars in movies, not to mention the various public relations and legal efforts by the RIAA to, er, encourage file-sharing abusers to stop their bad habits and buy their music, and you have the makings of a possible comeback by the music business that can only serve to help these embattled chains.