Radio Shack (RSH) For Sale? Cost Could Be Too High

The New York Post, not the single most reliable source for business news, says Radio Shack (RSH) is looking for a private equity buyer or an M&A transaction with a larger company like Best Buy (BBY). The paper reports that JPMorgan Chase “appears poised to lead the sales process for RadioShack.” Another alternative that the electronics retailer may consider is a share buyback which would use some of its $900 million in cash.

Radio Shack is too expensive to be a private equity target. The firm’s shares trade at $21.80, a two-year high. That gives the company a market cap of $2.7 billion. Any buyer which offered even a modest premium would have to agree to a purchase price in excess of $3.5 billion.

Radio Shack’s 10-K shows that it only made $205 million on $4.3 billion in sales in 2009. It may be hard to find a buyer willing to pay seventeen times net income, even though the company does have a reasonably strong balance sheet.

The rumors about the sale of Radio Shack are almost certainly nothing more than rumors which have become a larger and larger part of the Wall Street M&A game. Recently Palm (PALM), Sprint (S), and GameStop (GME) have been on the market, or so the press has reported. None of the companies entered into a transaction and it is likely that none of them seriously considered a buyout.

The Radio Shack rumor may last a day or two, but no one will buy a company that is only modestly successful.

Douglas A. McIntyre