Best Buy has handed off its ailing Musicland group to a private investment firm that paid no cash for the subsidiary, but assumed all of its liabilities.
Less than three months after Best Buy announced it would divest the music chain, the company cut a deal with Sun Capital Partners, a leveraged buyout specialist in Boca Raton, Fla., with a record of putting businesses back in the black in under a year.
Under terms of the deal, Sun Capital inherited all of Musicland's approximately 1,100 Sam Goody, Media Play and Suncoast music stores, and all of its liabilities — including nearly $500 million in lease obligations. Lehman Brothers analyst Alan Rifkin pegged Musicland's total assets at $554 million and its liabilities at $345 million.
The agreement also calls for Best Buy to provide transition support services, including distribution and logistics, for up to one year for a fee, and to retain a Musicland distribution center in Franklin, Ind.
Sun Capital will operate the business with Connie Furhman continuing as president, and no major layoffs of Musicland's 10,000 employees are planned.
Wall Street lauded the move, sending Best Buy shares up within minutes of the announcement.
Best Buy acquired Musicland for $685 million in February 2001 with an eye toward expanding its portable digital product mix while tapping into its mall-based demographic of women, teens and Gen-Y. But a sharp downturn in mall traffic and demand for pre-recorded music weighed heavily on the chain, which lost $72 million last year. For the most recent fiscal quarter ended May 31, sales fell 22 percent to $300 million.
Also undermining Best Buy's Musicland strategy was a misperception by consumers that Sam Goody's digital products were over-priced, when in fact their retails were comparable to those of Best Buy's. What's more, Sam Goody lost some of its traditional customer base when it reduced its CD assortment, a tactic that had increased music sales and inventory turns when employed at Best Buy.
Vice chairman Brad Anderson said he was pleased with the clean break from Musicland, and acknowledged the original deal as a "strategic mistake."
"It was a painful and expensive lesson," he said.