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Coinstar Buying Major Stake in Redbox

17 Nov, 2005 By: Holly J. Wagner

Freestanding change exchange company Coinstar is buying nearly half of McDonald's Redbox DVD Vending machine venture with a $20 million investment.

Coinstar will own a 47.3 percent share of Redbox, which offers $1-a-night DVD rentals from machines at McDonald's restaurants and a smattering of grocery stores in eight American markets. The machines have rented more than 3 million DVDs since Redbox parent company McDonald's Ventures LLC started expanding markets aggressively five months ago.

“Customers tell us they like having movies on our menu,” said Chris Catalano, chief investment officer of McDonald's Ventures, LLC. “Partnering with Coinstar is an exciting next step that will enable the expansion of Redbox to more locations. Coinstar has had tremendous success building a complex network of self-service kiosks. They understand the complexities and nuances of this business, and have excelled in delivering high profit per square foot services to retail customers.”

Coinstar will serve as the exclusive sales agent for Redbox in the United States for supermarkets, mass merchants, drug stores and wholesale clubs — locations where Coinstar has already made inroads. The company has a 100-store trial in Wal-Mart stores launching early next year.

Coinstar plans to invest $20 million in cash at the close of the transaction and another $12 million after a year if the program hits growth targets. After the second year, Coinstar has a 12-month option to buy additional shares for a majority voting interest in the business. The transaction is expected to close in the next 30 days.

Redbox will continue to operate independently out of its headquarters in Oakbrook Terrace, Ill. The company will be managed by a four-person board of directors, with two positions appointed by Coinstar and two by McDonald's Ventures.

Redbox executives believe the DVD self-service kiosk market segment has growth potential in excess of $3 billion by 2009.

“We are very excited about teaming up with McDonald's Ventures on this business,” said Peter Rowan, VP of new business innovation at Coinstar. “Redbox is a proven product that has already gained consumer and retailer acceptance in the United States. Further, Redbox is a great addition to our '4th Wall' product portfolio that helps retailers increase traffic and profit at the front of their stores – with no labor or cost requirements.”

The Redbox business has been in operation since 2002.

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