The $2.65 per share all-cash deal announced Monday is nearly double the music network's Friday closing price but a small sum to pay for Best Buy, which gets access to Napster's 700,000 subscribers who pay a monthly fee to access digital music catalogs.
"It's not a huge investment, but it definitely has brand recognition," said Morningstar analyst Brady Lemos, who said Best Buy also benefits from the acquisition of technical expertise about the digital music industry.
In a statement, Best Buy valued the deal at $121 million, and said the difference was due to unvested employee stock awards at Napster. According to its most recently quarterly filing, Napster had about 47.9 million shares outstanding as of Aug. 8, implying a price of $126.9 million.
Napster, a once-free file-sharing network incorporated in 2000, was a favorite tool among cheap college students earlier in the decade. But as the service gained popularity, the company became the sworn enemy of heavy metal band Metallica and along the way fueled a cultural, legal and political debate about copyrights and intellectual property while at the same time helping popularize digital music.
"We believe Best Buy will be an ideal partner for Napster and are very excited by the benefits that this transaction delivers to our shareholders, partners and employees," Napster Chairman and Chief Executive Chris Gorog said in a statement.
The takeover, which must receive regulatory and shareholder approval, is expected to close in the fourth quarter.
Richfield, Minn.-based Best Buy said it doesn't plan to relocate Napster from its Los Angeles headquarters or make any "significant" personnel changes.
Morgan Keegan & Co. analyst Tavis McCourt called the offer a "potentially intriguing acquisition."
"Best Buy has been making headway into selling mobile handsets recently, and has been offering a Best Buy Music Store (powered by Rhapsody) for some time," McCourt told investors in a research note. "We expect Best Buy will likely utilize Napster as a means of bundling digital content with its PC and mobile handset offerings."
Meanwhile, Standard & Poor's analyst Michael Souers said Napster will play an important role in Best Buy's efforts to fuel the growth of its digital music division.
"We see (Best Buy) continuing to expand offerings in digital media content and we think (Napster) will play an important role in this transformation," he told investors.
The deal is also a boon for Napster, which last month reported a loss of $4.4 million, or 10 cents per share, as revenue slid 6 percent. Experts said it would likely face more struggles on its own as the popularity of Apple Inc.'s iTunes grows.
"This is, in our view, the optimal outcome for Napster, a music brand and online service that independently might otherwise have dissipated," BMO Capital Markets analyst Leland Westerfeld told investors in a research note.
Napster shares rose $1.17, or 86 percent, to $2.53. Meanwhile, Best Buy shares fell 79 cents, or 1.8 percent, to $43.70.
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