FEB. 12 | Supermarket stalwart Coinstar said today it will buy the 49% of Redbox it doesn’t already own for about $175 million in cash and stock and detailed more expansion plans for the DVD kiosk operator.
Fourth-quarter profit from Coinstar’s DVD operations—which include Redbox with 12,900 machines at the end of 2008 and the much smaller DVDXpress with 800 machines—rose 119% to $20.4 million on sales that were up 158% to $133.8 million. For the full year, DVD earnings jumped 374% to $72 million, as revenue more than doubled to $399.5 million.
With as many as 20,000 Redbox machines slated to be in place by the end of 2009, sales this year will be as much as $750 million, with earnings of as much as $120 million, Coinstar said.
Redbox has led growth in the U.S. kiosk industry, which is expected to expand over the next few years as video store chains such as Blockbuster and Movie Gallery close underperforming stores. Redbox boosted its machine count to a current 12,900 from 6,550 last year through agreements with chains such as Wal-Mart and Walgreens, and will install as many as 8,000 new machines this year, up from a prior forecast of as many as 6,000 new kiosks, said Coinstar, which estimated last year's same-store sales growth at more than 50%.
With such sales gains, Redbox has about 9% of the U.S. DVD rental market, up from 2.3% a year ago, Coinstar estimates. The company expects 13% market share for Redbox by the end of this year.
"We now have a DVD kiosk network that rivals our coin network in terms of size and profitability and has more physical locations for consumers than any DVD rental operator in the U.S.," Coinstar chief operating officer Paul Davis said on a conference call with analysts today.
Davis will succeed CEO David Cole next month.
Redbox continues to expand as both kiosk companies such as TNR/Moviecube and store chains including Blockbuster plan to do the same. Blockbuster, the largest U.S. movie-rental chain, agreed with NCR to make as many as 10,000 kiosks by early next year.
Closely-held TNR/Moviecube and DVDPlay, the second- and third-largest U.S. movie-rental kiosk operators, had about 2,300 and 1,400 machines at the end of last year, respectively.
Coinstar also said it will buy McDonald's' 44% share of Redbox for as much as $151 million and will acquire the rest of the minority shares for about $25 million, with both transactions expected to close by the end of the month. Redbox, whose 95% ownership was split evenly between Coinstar and McDonald's before Coinstar took a majority stake early last year, had planned to file for an initial public offering in June but postponed the effort after stock markets had their worst second quarter in six years.
Last October, Redbox sued Universal Studios Home Entertainment, alleging that the General Electric unit violated anti-trust laws by insisting on a revenue-sharing agreement with Redbox that, among other things, enforces rental-date and resale restrictions. Universal discontinued service through distributors Video Product Distributors and Ingram Entertainment on Dec. 1, forcing Redbox to make alternative arrangements for about 15% of its discs.
Cole said the Universal situation "was not a major disruption to our business," though he said logistics costs are higher. He declined to estimate when the dispute would be resolved.
Redbox in November started stocking some of its machines at Wal-Mart and other stores with Blu-ray discs and the following month said it would install its machines in as many as 2,600 7-Eleven stores.
The company said today that it would test Blu-ray rentals at different prices, though it hasn't decided what those prices will be.
Overall, Coinstar had fourth-quarter net income of $4.22 million, or 15¢ a share, compared with a loss of $37.2 million, or $1.34, a year earlier, as sales almost doubled to $261 million. DVD revenue, assuming full Coinstar ownership of its chains, accounted for 51% of Coinstar's fourth-quarter sales, up from 39% a year earlier.
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