RadioShack Auction: It’s All About The Cash

RadioShack, the electronics retailer that sells tape recorders and phone extensions, is apparently getting lots of interest from the private equity community.

At first blush, I was surprised that RadioShack still exists, let alone that it’s up for sale. But it seems that more than a few folks still visit “The Shack,” given its 4,000+ retail locations and 555 kiosks.

Goldman Sachs is running the auction, with suitors reported to include The Blackstone Group, Bain Capital and TPG Capital. A sale could be valued at more than $3 billion.

So why such interest in RadioShack? It’s the cash, stupid. RadioShack is sitting on $872 million in net cash, says Anthony Chukumba, senior research analyst for BB&T Capital Markets.

In 2009, RadioShack generated $461 million in EBITDA which Chukumba thinks will go up to $500 million this year. RadioShack also has $660 million in long-term debt.

“They have more cash than debt,” he said.

RadioShack’s low leverage and fairly strong balance sheet makes it a prime target for a buyout shop. Another plus is RadioShack’s wireless business, which generates about one-third of the retailer’s $4.3 billion in sales. The retailer is also selling the iPhone in about 3,000 of its stores.

RadioShack has been on the block for the past several years, says a private equity executive who first got the pitch around three years ago. After analyzing RadioShack’s financials, the source’s firm passed because the return potential looked too low, “The market for RadioShack stores is very saturated in this country so there is not a lot of growth available,” he explained.

Private equity firms like Apollo or Blackstone, which typically like low risk and returns in the low to mid-teens, would be the best buyers for RadioShack, the source adds.

Strategic buyers are likely NOT interested in RadioShack. Best Buy may have taken a peek, but also is considering opening its own 1,000 mobile stores. “So why would they want to buy RadioShack?” Chukumba asked.