Is Future Shop the Best Buy?

Best Buy Co. (Eden Prairie, Minn.) has agreed to acquire Canada's largest consumer electronics retailer, Future Shop, for $377 million. Under the agreement, the Burnaby, B.C.-based Future Shop would operate as a separate Canadian subsidiary of Best Buy. Future Shop currently operates 88 stores in Canada. The deal is scheduled to close in late September.

Not everyone seems to think the acquisition makes sense for the U.S. consumer electronics retailing leader. While Best Buy stock rose 4.8 percent on the announcement, and many retail financial analysts praised the deal, Standard & Poors downgraded its outlook on the company to “negative” from “stable.” The credit ratings agency said the cash transaction may require additional financing in the future, either to fund the purchase or to fund working capital needs which otherwise could have been financed from the company's current cash balances. It also noted that integration risk coupled with the potential use of additional debt to fund acquisitions could negatively impact credit measures and pressure existing ratings.

Best Buy is offering $11.05 in cash for each share of Future Shop. Future Shop founder Hassan Khosrowshahi (who owns 70 percent of the company) will relinquish his role as chairman and ceo, while president and coo Kevin Layden will continue as president of Future Shop and report to Best Buy vice president Brad Anderson. Best Buy made a similar deal earlier this year when it acquired Musicland Stores Corp., which it now operates as a subsidiary. At the time, it said its next move would be expansion into Canada.

Best Buy operates more than 1800 retail stores nationwide, in Puerto Rico and in the U.S. Virgin Islands – over 400 Best Buy stores in about 40 states (with heavy concentrations in the Midwest, Texas, California and Florida) and some 1300 stores operated by its Musicland subsidiary under the Sam Goody, Suncoast, On Cue and Media Play names.

It had planned to move into Canada with its own stores next year. Instead, it has bought its way in, and eliminated a major possible competitor in the process. Future Shop's 88 Canadian superstores sell computers, office equipment, software, home audio and video components, CDs, appliances and wireless phones. The company also owns five Computer City stores in Canada and sells online. Besides home and office electronics, Future Shop offers software training and equipment repair and maintenance. Until recently, it was operating about 24 stores in the U.S. – just south of the border — but closed them in 1999.