Bell purchase of The Source leaves tech analysts scratching their heads

Bell Canada’s announcement that it is buying electronics retailer The Source out of bankruptcy has received a mixed response: the financial community generally likes the deal, but technology analysts are underwhelmed. “It seems to be a good idea,” says John Henderson, an analyst with Scotia Capital. “It may be an expensive channel, but they were behind the game in terms of points of distribution.” Henderson’s view is seconded by Greg MacDonald, an analyst with National Bank Financial, who says that it is “a good deal for Bell if not a game changer.” Bell will pick up 756 electronics outlets from The Source – known to many Canadians as the former Radio Shack – of which about 450 are corporate stores and the rest dealer stores. This means that Bell will more than double the distribution points for its products from 723 to 1,479, putting it ahead of Rogers Communications, which has 1,000 stores, and Telus Corp. with about 800. Since George Cope arrived at the telecom giant, he has bemoaned the company’s less than successful retail strategy. More than two years ago, he said Bell was going to open more stores as a way to get its share of gross additions. And just last month, Cope committed to opening more retail locations as a way to increase the company’s market share. "We need to grow the number of locations that sell Bell Mobility product. From 2002 to 2006 when other carriers were growing distribution, Rogers and Telus added over 300 distribution points in those five years, Bell added 19," he said. "That's what happened to the market share ." However, The Source has a distribution deal with Rogers which doesn’t expire until the end of this year, which means Bell products won’t be available until January 2010 at the earliest. Tech and industry analysts contacted by Report on Wireless are less than sanguine in their view of the deal. “This deal doesn’t make any kind of sense,” says Lawrence Surtees, IDC Canada’s lead analyst covering the Canadian telecom services sector. “It’s a ‘me too’ move because Bell has been very much behind Rogers and Telus – they have had stores coast to coast, and Bell has not.” Independent telecom analyst Jon Arnold shares Surtees’ scepticism. “I don't see how this would give them an advantage over Telus or Rogers,” he says, “unless the stores will be converted – at great cost – to be totally built around Bell products and services.” That isn’t the plan. Instead, The Source will be a subsidiary of Bell, and will continue to sell third party consumer electronics products. The price Bell paid is likely much less than $334 million (US$260 million) that Circuit City Stores Inc. paid for Radio Shack’s 900 stores four years ago, and is likely even well under$190 million – the estimated cost of an independent build-out on a similar scale. In fact, in a research note Macdonald said “we would be surprised if the purchase price was above the $50 million to $75 million range.” “It is not a brilliant stroke, or part of a grand strategic vision, but a tactical move that follows its competitors,” says Surtees. “If I buy a bunch of stores, does that make me bigger and better at wireless? Not necessarily.” Surtees points out that The Source did not have a reputation for being cutting edge, and that Bell does not understand the retail market. In fact, Surtees argues that Bell should pay attention to fixing what is presently broken. “They still have some fundamental issues with service, billing, quality, and pricing to deal with.” Arnold also raises concerns about the market timing. Bell may want to increase its retail exposure in the wireless and TV, Internet and home-phone business, but is this really the time to go head-to-head with the likes of Wal-Mart, just as discounting is ravaging competition, consumers are cutting discretionary spending, and retail space is going begging? “I’m just not seeing the logic here,” says Arnold. “Maybe they're hoping that brand equity will transfer over to Bell by association. But maybe it won't.” On the financial side, Henderson says that the fact that Bell won’t start selling until January 2010 is moot, because they won’t be paying for The Source until the third quarter of 2009. “There will only be one quarter without Bell products, and they will get revenue from existing electronics sales.” That said, Henderson also has concerns about overall market conditions. “It will be a challenging period in the current economic environment. Clearly Rogers avoided this path, and clearly Rogers could have afforded to pay more than Bell.” Added to this, Arnold is worried about the branding. “Is The Source customer base really the best market for Bell to be aligning itself with?” asks Arnold. “They must think it is, and if so, that places them in the middle as a pretty mainstream brand. Nothing wrong with that, but their new branding seems more leading edge than that.” From a purely financial perspective, however, it could be argued that the deal is fairly low risk. The 750 stores generated stable Revenues of $643 million over the last 12 months, and there has been a seven year track record of profitability, with revenue being relatively stable throughout 2008. The problem is that these numbers might not mean much in a consumer-led downturn. “The consumer market is saturated up the yin-yang,” says Surtees. “In wireless you have to go after the business market – in the longer run this would yield much more than buying a bunch of bankrupt stores.”

Bell purchase of The Source leaves tech analysts scratching their heads

News | 03/05/2009 4:21 pm EST

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