Managers to Pay $410 Million for Musicland : Primerica Selling Retailer to Focus on Core Business

Top management of Musicland Group, the nation’s largest specialty retailer of recorded music and video products and operator of the Sam Goody stores in Southern California, said Monday that it has agreed to buy the company for $410 million in cash.

Primerica, the parent of Smith Barney Inc., now owns about 81% of Musicland and will sell it for $36 a share. The investment firm of Donaldson, Lufkin & Jenrette intends to arrange financing for the deal and would be a partner of Musicland’s current senior management.

The deal would convert Musicland to private ownership just a year after it went public.

“Our plans are to continue with our growth,” said Musicland Chairman Jack W. Eugster, 42, who will continue to head the Minneapolis-based company. “We have indicated that we are interested in opening at least 50 new stores per year” for at least three years, he added. “We’re continuing on that basis.”

Urged to Reduce Debt

Musicland, a highly regarded company with 1987 net income of $22.6 million on sales of $510.5 million, operates 616 stores in 47 states, including Alaska, a recent addition. In California, it operates 111 stores under the names Sam Goody and Musicland.

Eugster noted that California, where the company bought the Licorice Pizza chain in 1986, “has been very important to us.” He added that the market has an abundance of competitors, including Wherehouse Entertainment, Music Plus and Tower Records, “that I have a great deal of respect for.”

Keith E. Benjamin, an industry analyst with the New York investment house of Silberberg, Rosenthal & Co., said Donaldson Lufkin and Musicland management should have no trouble securing financing.

“I would hope there aren’t any radical changes here,” he added. “It’s hard for me to imagine what they could be doing better.” Benjamin added that he expects the company to generate $40 million in cash this calendar year, with which it “can open a lot of new stores.”

For Primerica, which will receive about $330 million for its share of Musicland, the sale is part of a strategy of becoming strictly a financial services company. Formerly called American Can Co., the Greenwich, Conn., company paid $750 million for the Smith Barney Inc. investment firm last spring and has been urged by credit-rating agencies to trim its debt.

Primerica has already sold its Looart Press Inc. mail-order business, a 17% stake in packager Triangle Industries and some timberland.

Since August, it has been entertaining bids for its successful Fingerhut Cos., a mail-order retailer that the company reportedly hopes to sell for $1 billion. Primerica spokesman Kenneth M. Koprowski said, however, that “since the turbulence in the financial markets we haven’t seen the price that we would like to. This isn’t a fire sale. We’ll wait for an acceptable price.”

Benjamin put the $36-a-share--or 14 times earnings--deal for Musicland near the bottom of a range of $35 to $40 that he figured the chain is worth.

“At $36, it’s essentially the same valuation that was given Wherehouse Entertainment,” the analyst said, referring to the Torrance-based retailer that recently agreed to a $118-million buyout by Adler & Shaykin, a New York investment firm. That deal is pending.

Benjamin said that he views Musicland as the industry’s premier retailer and therefore worthy of perhaps “a slightly better valuation.”

In composite New York Stock Exchange trading Monday, Musicland shares rose $3.50 to $32.50. Primerica shares dropped 50 cents to $27.875.

Primerica, which said it expects the deal to close in the year’s second quarter, intends to use the $130 million in anticipated after-tax proceeds to reduce debt.

IN THE LAND OF MUSICLAND The largest specialty retailer of recorded music and videotapes, the Musicland Group operated 616 stores in 47 states under several names, including 111 stores in California. The company is based in Minneapolis.

Sam Goody: 175 stores, including 74 in California (mostly in Southern California.)

Musicland: 421 stores, including 35 in California (mostly in Northern California.)

Discount Records: 13 stores, including 2 in California (one in Torrance and one in the San Francisco Bay Area.)

Videotape stores: Seven stores, operating under the names Paramount and Columbia, offer videotapes for sale. In addition, 50 music stores--mostly in Southern California--rent videos.