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Trader: NCR Should Buy Redbox

14 Jun, 2011 By: Erik Gruenwedel

Union could emulate Sirius/XM Satellite Radio market domination

A Wall Street trader-blogger says NCR Corp., which owns and operates Blockbuster Express rental kiosks, should acquire Coinstar Inc., owner of kiosk market leader Redbox.

In other words, David (Blockbuster Express) should buy Goliath (Redbox) since David’s parent (NCR) has deeper pockets than Goliath’s parent (Coinstar). Sounds crazy, right?

Not to Rocco Pendola, a Santa Monica, Calif.-based trader who, in a June 13 post on investor website SeekingAlpha.com argued that NCR should divert resources fighting Blockbuster’s new owner Dish Network over the right to use the Blockbuster name, and instead acquire majority interest in Coinstar, thereby assuming market control of the kiosk disc rental business.

“It seems to me that NCR could spend its time — and money — more wisely by making an aggressive attempt at dominating the DVD rental kiosk space,” Pendola wrote.

Indeed, Redbox dominates the kiosk disc rental space, with more than 30,000 kiosks in more than 26,000 locations nationwide — nearly a threefold advantage over rival Blockbuster Express, with more than 9,000 kiosks.

Pendola says Coinstar investors have continually fretted about Redbox’s challenges, with 28-day embargoes and inventory management issues. Redbox management says it has dealt satisfactorily with both issues.

Regardless, public companies are all about maximizing shareholder value, which often includes generating incremental revenue via acquisitions.

Indeed, NCR, according to recent financials, has relatively little debt ($11 million) and deep pockets ($480 million in cash). In fact its biggest fiscal headache going forward appears to be an employee pension program and making Express profitable.

NCR dominates the global self-serve ATM business. And that makes sense; it invented the cash register.

Meanwhile, Coinstar has available cash of $23 million, burgeoning debt of $355 million and lots of nervous investors, according to Pendola.

“If Coinstar has its kiosk sights set on anything beyond coins, DVDs and video games, it needs some firepower behind these efforts,” he wrote. “NCR can provide it.”

Eric Wold, research director with Merriman Capital in San Francisco, and bullish advocate of Redbox, disagrees.

Wold said Coinstar remains focused on developing proprietary vending technologies he believes would eventually be valued higher than NCR. The analyst said NCR’s ATM-centric business has seen flat to declining revenue trends throughout the past five years (revenues have grown from $4.6 billion to $4.8 billion between 2006 and 2010).

On the other hand, Wold said Coinstar developed its coin-counting kiosk in-house and was instrumental in the early development of Redbox with McDonald’s — and the company’s R&D staff developed seven of the nine kiosks currently in test in-house.

“I think acquiring a faster-growth company would be a positive for NCR’s valuation and investors, but a negative for CSTR shareholders and what they could eventually see from the market once the recent concerns are passed,” Wold wrote in an email.

Edward Woo, research analyst with Wedbush Securities in Los Angeles, agrees NCR has deeper pockets but believes Coinstar should acquire Express kiosks, which he said have been a drain on the company's core ATM business since it launched the NCR Entertainment division. Woo said the uncertainty surrounding NCR retaining the Blockbuster name further justifies it selling the business to Coinstar.

Indeed, NCR management seems commited to rolling out its previously stated goal of 10,000 Express kiosks, but uncertain thereafter. In recent fiscal calls, CEO Bill Nuti reiterated support for Express kiosks but added that he liked to see the business at least break even by the third quarter this year. Losing the Blockbuster name could significantly derail that goal.

"NCR Express doesn't mean anything to consumers," Woo wrote in an email.

Representatives from NCR and Coinstar were not immediately available for comment.

About the Author: Erik Gruenwedel

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