Buyout or Not, this Company Will Do Fine
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a recent article from Geekwire, an idea I had not heard was proposed, “Amazon.com (NASDAQ: AMZN) should buy Coinstar (NASDAQ: CSTR): A Tech Prediction That Makes A Ton Of Sense.” According to Geekwire, a few months ago rumors were circulated that Amazon was considering opening physical retail stores. The theory is Amazon's lack of a retail presence has been a huge advantage in the past, and now this could be seen as a disadvantage. In particular, the fact that Target (NYSE: TGT) was firing back at Amazon by not carrying the Kindle lineup was mentioned. While there is no doubt that the over 1,000 Target stores not carrying the Kindle is a negative, I'm not sure that this example alone is the reason Amazon wants to go physical.
I've written in the past that I don't believe the whole showrooming movement is as real as some would suggest. While it is certainly true that individuals will check online to compare prices on certain items, it just doesn't work on low-margin or specialty items. For instance, I doubt that Amazon is going to make a living selling perishables any time in the near future. However, what does work is selling higher-margin products. Amazon can live with razor-thin margins to cut out competition, and in exchange they get more of the customer's wallet share. The idea of having a physical presence without all of the overhead sounds like it makes sense on the surface.
The theory behind the idea of Amazon buying Coinstar is the company gains the physical presence of automated kiosks without the headaches and costs of running stores. Since Coinstar has over 30,000 kiosks in operation, I can see this making some sense. However, the main focus for Amazon's buy, according to the Geekwire article, is the kiosk that Coinstar calls Gizmo. This machine is being test marketed with the idea of selling refurbished electronics. According to Coinstar, the company believes that there is a market for up to 2,000 of these machines. Here is the bottom line problem I have with the suggestion: Amazon is going to spend at least $2 billion (Coinstar's current market cap) to buy a concept that has the potential for 2,000 machines? This naturally leads up to the question of what about Coinstar's main businesses?
What About Redbox? What About Coinstar? What About Streaming?
What about the 30,000 Redbox locations? In theory, Amazon could re-work these machines to both rent videos and sell them. Amazon certainly would have access to the stock of videos to sell the items, and this business is highly profitable for Coinstar, which I'm sure Amazon shareholders wouldn't be opposed to. What about the over 20,000 Coinstar kiosks? These kiosks are going to have access to PayPal's service to both load and withdraw funds. Wouldn't this be a bit tricky for Amazon to deal with considering that PayPal is owned by eBay (NASDAQ: EBAY), one of Amazon's fiercest rivals? Last but not least, what about the streaming agreement with Verizon (NYSE: VZ) and the 35% ownership that Coinstar has in this venture? The two companies are expected to offer a streaming video plan that combined with Redbox would allow customers to both stream video and use their local Redbox to get more current titles. With Amazon being a direct competitor to this venture, I'm not sure how this would work either. The bottom line is, the majority of Coinstar's business doesn't fit with Amazon, and in order to make it fit, Amazon would have to make some deals with direct competitors.
Who Should Buy Coinstar If Not Amazon?
So who should really consider buying Coinstar? I would suggest either a current partner or a retailer. What better way to keep this gem out of Amazon's hands than for a company like Verizon to snap it up. Verizon already owns 65% of the new streaming venture, and the company has a $127 billion market cap. I don't think Coinstar shareholders would be too opposed to a stock for stock deal. This would allow them to cash out their shares and own stock in a more stable company with a significant dividend. I would also suggest a retailer like Target could make sense. Target already has physical locations, and they could utilize these kiosk ideas inside of their existing stores to save selling space. The company has a market cap of $38 billion, which dwarfs Coinstar, and the upcoming streaming deal with Verizon would be another arrow in the quiver of Target to take the fight to Amazon. There are other companies that might make sense as well, but either way I just don't see this being a good fit for Amazon. In the meantime, Coinstar is profitable, growing, and relatively cheap at just 14.45 times 2013 earnings. With our without a buyout, Coinstar will do just fine.
MHenage owns shares of Verizon Communications. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.