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UPDATE: Djangos Proposed CD Warehouse Acquisition Could Bring Internet Synergies

1 Nov, 2001 By: Joan Villa


Used and new music and movie retailer Djangos.com Inc. is going after its biggest acquisition to date with a letter of intent to acquire all shares of its competitor, 295-store CD Warehouse Inc.

The move would pay $1.50 each for CD Warehouse's 3.66 million shares and take the struggling retailer private, says Steve Wood, chairman and c.e.o. of Djangos, which is privately held. The two chains are in a due diligence phase that is expected to result in a definitive agreement requiring shareholder approval.

“I don't know what specific synergies or economies of scale exist yet,” notes CD Warehouse senior v.p. and general counsel Michael Chionopoulos. “I can tell you that Steve Wood and his team of management people are impressive and that leads me to believe there might be some significant synergistic possibilities.”

CD Warehouse began focusing on new and used DVD sales this year, Chionopoulos says. Djangos' jumped into new and used DVDs almost immediately, Wood says, selling and trading the format online and in 19 stores operating under the names Djangos' Moby Disc, Djangos' Cellophane Square, Django Records and Djangos' Second Hand Tunes in California, Illinois, Washington and Oregon. If the deal is completed, Djangos would follow the same strategy of attaching the Djangos name in front of CD Warehouse to leverage consumer awareness of both brands, according to Wood.

Wood says his company has perfected the Internet as a tool to connect buyers and sellers while utilizing the stores as mini-distribution centers. That approach brings incremental value to each store, which manages its own inventory while fulfilling online orders, he says.

Djangos, a privately held company based in Portland, Ore., has bucked the general malaise in the music sector with same-store sales that average 26% over calendar year 2000, he notes.

“Our premise is using technology in a smart way to create efficiencies that traditional brick-and-mortar stores cannot,” Wood says.

While stores typically mark down product in discount bins and wait for a walk-in buyer, Djangos sells to customers in 95 countries from its Web site.

“The audience for that unit has now gone from a particular market within a neighborhood to the world,” he adds. “Something that might have sat on a shelf for six months in Chicago might now sell in six minutes online.”

CD Warehouse abandoned its 18-month-old Internet strategy around September 2000, after it couldn't make its online efforts economically viable, Chionopoulos says. Like many music outlets, the chain suffered from declining sales and Internet competition, reporting a 17% drop in revenues to $6.7 million for the second quarter ended June 30, the last period that figures were available. The company shuttered 10 locations from the year-ago quarter, leaving it with 64 corporate stores and 231 franchisees.

Meanwhile, the CD Warehouse Franchisee Association, representing some 120 stores, is slated to hold a phone conference this week to discuss the acquisition's impact. CDWFA president Jim Boushka says so far neither company has shared details of the deal with him or the franchisees. He believes the acquisition could have “positive potential,” although at this point many franchisees are so disgruntled with a perceived lack of benefit for their royalty payments that they “just want out” of their contracts, he adds.

“I think there's a way to create harmony again in this industry and I look forward to seeing what [Djangos'] ideas are,” he notes. “There can be a fit, but they haven't franchised before and we haven't been on the Internet before.”

Wood expresses an “unwavering commitment” to the success of the franchisees and says he plans to “bring their businesses to a new level,” although he is currently bound by confidentiality from disclosing details.

“For those franchisees that have long expressed frustration with the industry, we hope to offer an economically viable strategy that increases the total success of the Djangos family,” he noted in a statement.


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