Best Buy acquires Canadian retailer Future Shop for $377 million
Janet Moore
Star Tribune
Wednesday, August 15, 2001
When Best Buy Co. Inc. moved into its Eden Prairie headquarters in 1991, Chairman and CEO Richard Schulze insisted that the outside sign read: World
Headquarters. At the time, the consumer electronics retailer was known mostly as a regional chain.
That changed Tuesday, when Best Buy announced it had bought Future Shop Ltd., Canada's biggest electronics retailer, for $377 million. The news -- which sent
both companies' shares soaring -- means Best Buy truly is an international retailer.
The acquisition -- only the third in Best Buy's 35-year history -- accelerates the company's plan to enter the lucrative Canadian market,
and executives hinted that other global horizons beckon.
While Best Buy had intended to build brand new stores in Canada -- about 65 or more in the next three to five years -- buying Future Shop,
based in Burnaby, B.C., means that the company now has an established 88-store stronghold there. Beyond that, Best Buy intends to open 30
additional stores in Canada.
The move also eliminates the company's most formidable competitor in Canada.
"Basically, we shifted our mode of entry by buying Canada's No. 1 player," said Schulze, who was in Vancouver, B.C., to announce the deal.
The cash offer equals $17 Canadian per share, marking a 48 percent premium to Future Shop's closing stock price Monday on the Toronto Stock Exchange.
"I think it is a very cheap [purchase] price," said Todd Kuhrt, an analyst at Midwest Research. "It think part of the reason the market reacted this way is that [Best
Buy] did not overpay and that eliminates some of the risk of the transaction."
Shares of Best Buy closed Tuesday at $61.09, up $2.80, while Future Shop's stock closed at $16.34 per share in Canadian dollars, up $5.34.
"By buying their way in, they've immediately taken out their biggest competitor and established a No. 1 position in market share," said Rick Fradin, an analyst at
William Blair & Co. "There's a lot there that makes sense."
Different retail strategies
Buying into the $13 billion Canadian consumer electronics market might prove easier than trying to start new, said Randy Scotland, vice president of
communications for the Retail Council of Canada, an industry trade group. That's because there are a number of cultural and linguistic differences between the two
countries that are often difficult for U.S. companies to bridge.
Expansion efforts into Canada by a number of U.S. retailers -- such as sporting goods chain Sportmart -- have proven disastrous. "Some retailers have not had such
an easy go of it," Scotland said. "Part of the reason is that they assumed that Canada is the 51st state. They think the same retail strategies that worked so well in the
[United States] will cross the border without any hindrances, and that Canadians will fall in line."
Ironically, Future Shop tried to expand into the United States in 1992 by opening 28 stores in five states. The strategy later failed, costing Future Shop millions before
the company retreated.
An excellent fit
With the acquisition, Best Buy said Future Shop will operate as a separate subsidiary. Kevin Layden, a former Circuit City executive, will remain as Future Shop's
president and chief operating officer. However, founder Hassan Khosrowshahi -- one of Canada's richest businessmen who is worth about $300 million -- will
relinquish the chairman and CEO titles.
The name of the Future Shop stores ultimately will be changed to Best Buy, although a timetable on the switch was not divulged.
In a conference call with analysts, Best Buy officials touted what they perceive as the deal's many synergies. "The fit was excellent," Schulze said. "Future shop falls
squarely in a business that we excel in and know well -- technology and entertainment. ... The merchandise mix is virtually the same as Best Buy stores."
Yet some noticeable differences do exist between the two retailers. First, the footprint of Future Shop stores at 25,000 square feet is quite a bit smaller than the
average Best Buy store at 45,000 square feet. Future Shop employees work for commission -- a sales strategy abandoned by Best Buy years ago. And the stores have
different supplier networks.
The latter may prove difficult for Best Buy to master, according to Scotland, of the Canadian retail council. "Canada only has 30 million people, less than state of
California," he said. "Our population is more or less stretched a very long border making the logistics of retail a bit of a challenge, transporting goods from warehouse
to stores and the distance between major markets."
Still, Future Shop appears to do quite well despite those challenges. Profit jumped 37 percent during its last fiscal year, because of robust consumer demand for digital
products.
Brad Anderson, Best Buy's president and chief operating officer, said the Canadian marketplace is about six to 12 months behind the United States in adopting new
digital technologies. He sees great potential as these products -- such as DVD players and digital cameras -- catch on in Canada.
The acquisition will add 1 to 2 cents to per-share earnings in the current fiscal year, said Best Buy's chief financial officer, Darren Jackson. Best Buy's earnings are
expected to rise to $2.17 per share this fiscal year, compared with $1.86 per share last year, according to analysts surveyed by Thomson Financial/First Call.
Standard & Poor's Corp. revised its outlook on Best Buy debt from "stable" to "negative" claiming the Future Shop acquisition may need additional financing.
-- Janet Moore is at jmmoore@startribune.com .
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