Best Buy steps back from Speakeasy

  • Article by: WENDY LEE , Star Tribune
  • Updated: June 11, 2010 - 11:40 PM

It will meld the Internet phone business into a combined venture.

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Best Buy appears to be reversing an effort to diversify.

Electronics retailer Best Buy Co. has agreed to combine its Internet phone business Speakeasy with two California-based companies in a move analysts characterized as a step back from an effort to diversify into business services.

The Richfield-based company had picked up Speakeasy in 2007 for $97 million to boost its offerings outside its core business of selling consumer electronics. It will continue to hold a minority stake in the combined venture, though analysts questioned for how long.

"It is a sign that perhaps they are leaving the industry," said R.J. Hottovy, a senior analyst with Morningstar. "At best, it was only marginally profitable."

Best Buy said late Thursday that Speakeasy will be combined with San Jose-based Covad Communications Company and Costa Mesa, Calif.-based MegaPath Inc., both of which provide Internet services to businesses.

The companies billed the transaction as creating a business that will provide Internet voice phone service, security, as well as virtual private network and internet services.

Financial details were not disclosed in the transaction, which is expected to close in the third quarter, and Best Buy did not return calls seeking comment.

Best Buy's stock closed Friday at $41.20 a share, up 96 cents.

Glen Swanson, senior vice president of Best Buy's Business Customer Group, said in a news release that he believes Speakeasy will add "significant capabilities" to the new venture and provide a platform for Best Buy to learn more about the business customer segment.

Speakeasy, an Internet and Internet phone service provider, has more than 30,000 small business customers nationwide.

When Best Buy bought it in 2007, the company had 300 employees and had generated $80 million in 2006 sales. Analysts said Speakeasy did not have a material impact on Best Buy's bottom line, as the retailer had $16.6 billion in sales for the quarter ending Feb. 27.

Craig Young, MegaPath's current CEO, will serve as executive chairman of the combined businesses. Bruce Chatterley, Speakeasy's CEO, will be president of the commercial division, dealing with non-wholesale customer sales and marketing. Pat Bennett will continue as CEO of Covad Communications.

Michael Pachter, a research analyst at Wedbush Morgan Securities, said he views Best Buy's decision to become a minority investor in the new venture as a positive sign the company will go back to focusing on its core business.

Pachter said of Best Buy's purchase of Speakeasy, "It just doesn't compute."

Wendy Lee • 612-673-1712

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