January 24, 2000 1:30 PM PST

CompUSA gets lifeline from Mexican investors

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Struggling computer retailer CompUSA today received a new lease on life when Mexican conglomerate Grupo Sanborns announced it would buy the chain for approximately $798 million.

The deal, which was proposed on Friday by Sanborns and completed early this morning, is being viewed positively by analysts. A key reason is that Sanborn's chief investor--Carlos Slim Helu--is one of Latin America's most influential business figures. In addition, Grupo Sanborns already has an understanding of CompUSA through a 14.8 percent interest acquired last year.

"(Slim) is known as the Warren Buffet of Latin America," said Marc McCarthy, a Bear Stearns analyst, who estimated his wealth at upwards of $10 billion. "Because of Microsoft's joint-venture with (Telefonos de Mexico), he can call (Bill) Gates up anytime. He's definitely not some fly-by-night investor."

Meanwhile, despite an incredibly strong brand name, CompUSA has been struggling. Like other computer retailers, Dallas-based CompUSA has battled with declining PC prices and heightened competition. It also has labored under its own unique problems.

At the zenith of its power in 1996, CompUSA reacted slowly to changes in the industry, such as the sub-$1,000 PC and Internet sales, analysts say. The company also was stuck with a lingering reputation for lackluster customer service while efforts to branch out into corporate sales, the Internet or its own brand of PCs brought only tepid results.

"In 1995 and 1996, they were the hot company. They had the momentum, and when they started to lose that momentum they failed to notice it," said Matt Sargent, of Sargent Consulting. "CompUSA was very cemented in the PC hardware business, so they were hurt dramatically when prices came down."

A rift had also emerged between stockholders and company management. A number of shareholders at a November meeting voiced their concern about the company's direction, acknowledged a CompUSA spokeswoman, among others. At one point, after being pestered by a shareholder, CEO James Halpin said, "If you don't like the way we are running the company, then sell your stock," recalled one observer.

The shift in power may be tough on CompUSA executives, one analyst said.

"Despite what management may say, I expect the senior management will be replaced," said David Goldstein, president of Channel Marketing Corporation, which analyses the retail market.

Goldstein, among others, was otherwise upbeat on the transaction because of the situation that CompUSA is in at the moment. Margins and profits have been declining. Few, if any, of the new ventures the company has launched over the past few years have paid off.

CoZone, CompUSA's Internet store, for instance, saw sales grow from $6 million in the third calendar quarter to just $7.5 million in the fourth quarter, said Goldstein. The paltry $1.5 million gain, however, was offset by an ad campaign that cost millions. Among the problems: CompUSA could not bring its prices in line with some of the ultra-cheap Internet sellers, Goldstein said. CoZone's CEO recently left after a few months on the job.

The 1998 acquisition of Computer City also has not gone well. CompUSA thought sales would increase by $2 billion, a boost that didn't happen. "Customers shopped there (Computer City) because they weren't shopping at CompUSA."

The company was also hit hard by the growth of direct sellers Gateway and Dell Computer. Electronics superstores, which are more insulated from PC price declines because of a wider product selection, also cut into CompUSA's sales.

"They have been challenged especially by Best Buy for leadership in terms of computer products," said Steve Baker, an analyst with PC Data. CompUSA's corporate sales effort has been hurt by the same sort of price factors, he added.

Retailer Grupo Sanborns, meanwhile, presents a contrast. The company operates 305 stores through out Mexico, such as Sears Roebuck de Mexico, Sanborns Caf? and bakery chain Pasteleria el Globo. The retailer also manufacturers food and household items sold in Mexico.

The company, founded in 1903 by Walter and Frank Sanborns, started as a drug store that quickly expanded into other merchandise. The store weathered the vagaries of the revolution but managed to remain intact. President Porfirio Diaz, Pancho Villa and later visiting Americans can be counted as patrons.

In 1946, Frank Sanborn sold the company--with its two stores--to Walgreen de Chicago. Thirteen years later, the operation was sold to Grupo Carso, which operated 31 stores through out Mexico.

Grupo Sanborns is indirectly owned by billionaire Slim, one of the richest men in Latin America. Slim controls Grupo Carso, which operates Grupo Sanborns as its retail holding.

Slim, an investor in undervalued stocks such as Philip Morris, OfficeMax and Apple Computer, also controls Mexico's largest telco company, Telefonos de Mexico SA, and he owns a stake in Prodigy Communications via his Carso Global Telecom SA.

"It looks to be a positive. He tends to be a buyer of undervalued assets.... At a minimum somebody recognizes the fact that the brand name and the presence that CompUSA has is worth a hell of a lot more than Wall Street thinks," said Baker.

Last October, Microsoft announced a joint venture with Telefonos de Mexico, as it sought to expand its Web portal overseas.

 

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