RadioShack Calls in the Bankers to Talk Buyout

This year, RadioShack (RSH) has been the subject of a variety of buyout rumors. The latest has come from a story in the New York Post, indicating that the company has retained JP Morgan (JPM) to explore strategic options, such as a possible leveraged buyout. A deal may be worth as much as $3 billion.

On the news, the shares of RadioShack were up 8.85% to $23.73 in mid-afternoon trading.

In light of the relentless changes in the retail landscape -- especially the current dominance of big-box retailers like Wal-Mart (WMT) and Best Buy (BBY) -- RadioShack certainly needs to think about shareholder value. Just look at the problems Blockbuster Video (BBI) is having, and the emerging issues at H&R Block (HRB); both are feeling the pain from Internet-based competition.

The Slow Burn at RadioShack

The origins of RadioShack go back to 1919 in Fort Worth, Texas. Interestingly enough, the company sold leather shoe parts. Of course, since then RadioShack underwent many changes. But the pivotal decade was the 1970s, as the company saw torrid growth amid the CB radio craze and the emergence of personal computers.

While the 1980s were also strong, RadioShack began feeling growing pains, and by 2005, the situation was looking dire. So the company hired Julian Day, who had a strong turnaround record at companies like Safeway (SWY) and Kmart. He wasted little time in paring back stores, cutting costs, laying off employees and changing the product mix.

Now, RadioShack has 4,470 stores, 1,300 dealer outlets and 450 wireless phone kiosks. It has also forged key relationships with companies like AT&T (T), Microsoft (MSFT), Casio, and Sprint (S).

According to the most recent earnings report, RadioShack posted full-year revenues of $4.28 billion, up 1.2%. Net income was $205 million. All in all, it was a good performance in light of the recession and intense competitive environment.

But perhaps the most important indicator is cash flow, which increased $93 million last year. In all, RadioShack has $908 million in the bank. This will definitely make it much easier to finance a leveraged buyout.

Time for Urgency

With an average footprint of 2,500 square feet per store, RadioShack does look like a throwback to another age. But the fact is that this format is attractive, especially for selling mobile devices and accessories. The highly successful Apple (AAPL) stores aren't massive either

In fact, RadioShack competitor Best Buy is getting aggressive with its mini-store concept. Not only is the company rolling out mobile departments in its big-box stores, it's also opening standalone locations. In other words, a RadioShack acquisition could be an attractive play for Best Buy to jump-start things.

For now, though, it looks like RadioShack is in the early stages of the process, and a sale of the company is not likely to happen for at least a couple months -- if at all.