Technology and consumer electronics retailer Best Buy Co Inc is planning to acquire digital music service provider Napster Inc for $121 million in cash. The move is being seen as an endeavour to compete with Apple's dominant iTunes service that sells digital music for its iPod players.

Apple effectively controls around 70 per cent of the US digital market, while Best Buy, amongst the largest consumer electronics retailers in the US, is also one of the largest retailers of compact discs, though it does provide digital subscription services.

Napster, the online music file sharing service that was accused of copyright violations, also provides digital subscription services. By combining forces with Best Buy, Napster and the retailer are playing to secure a fair chunk of the Apple-controlled market, by collaborating instead of competing with each other.

Best Buy has announced that it will pay $2.65 per Napster share, almost double of its closing price on Friday. Napster shares were up by a whopping 87 percent in early trading at $2.54.

This is not the first move by the retailer, who had teamed up with REalNetworks Inc and SanDisk Corporation in 2006 to create a digital music subscription service and a compatible media player. Best Buy now plans to use Napster to extend its customer reach across an array of devices, including Napster's 700,000-odd subscribers, web-based customer service and mobile capabilities.

Best Buy's moves outside of traditional consumer electronics are driven by its ambition to double its annual sales to $80 billion over the coming five years.

For some time, Napster had been faced with a threat of a proxy battle by three dissident investors, who questioned the company's management's strategy to compete with iTunes. The firm's share price had dropped around 60 per cent from a high of $5.80 in October 2007. Napster had announced its willingness to consider a sale last month, hiring UBS Investment Bank to get options.

Napster's main business is a subscription based service that gives users access to an unlimited library of music for a flat monthly charge of $15. One of the biggest factors hold back subscription based services, which is also the reason iTunes holds a 70 per cent share of the digital music market, is that they are unable to work with Apple's iPod that holds around 73 per cent of the market for MP3 players.

The transaction, with an aggregate purchase price of approximately $121 million (or $54 million net of approximately $67 million in cash and short term investments of Napster as of June 30, 2008), is subject to customary closing conditions, including the tender of a number of Napster shares that constitutes a majority of Napster's outstanding shares of common stock (on a fully-diluted basis). The transaction is expected to close during the fourth calendar quarter.   The transaction has been unanimously approved by the board of directors of Napster, and Napster's directors and executive officers have agreed, in their capacities as stockholders, to tender their Napster shares and otherwise support the transaction.

In conjunction with the definitive merger agreement, Napster CEO Chris Gorog and key members of senior management of Napster have entered into employment agreements, effective at closing, pursuant to which they have agreed to continue as the Napster leadership post-acquisition.

Best Buy believes that Napster has one of the most comprehensive and easy-to-use music offerings in the industry, including streaming music, music subscriptions, the ability to purchase individual tracks, albums and mobile offers.

Napster has around 140 employees, with its headquarters in Los Angeles. At this time, Best Buy does not plan to relocate Napster's headquarters or to make significant changes in personnel.

''This transaction offers Best Buy a recognized platform for enhancing our capabilities in the digital media space and building new, recurring relationships with customers,'' said Brian Dunn, President and COO of Best Buy.

''Over time we hope to strengthen our offerings to consumers, who we believe will increasingly seek devices and solutions that enable them to access their content wherever, whenever and however they want.''

''We believe Napster brings us excellent capabilities in the mobility space, as well as international operations and an established team of technology experts,'' said Dave Morrish, Executive Vice President – Connected Digital Solutions of Best Buy.

''We can foresee Napster acting as a platform for accelerating our growth in the emerging industry of digital entertainment, beyond music subscriptions. We're very excited to add these capabilities to leverage our existing relationships with the labels, the studios, and the hardware providers. We believe Napster will be an outstanding addition to our already robust portfolio of partners and offerings in the digital music space.''

''We believe Best Buy will be an ideal partner for Napster and are very excited by the benefits that this transaction delivers to our shareholders, partners and employees. Best Buy is uniquely positioned to benefit from Napster's digital entertainment distribution platform. We are looking forward to combining our digital media capabilities with Best Buy's resources and global network to extend our digital content platforms,'' said Chris Gorog, chairman and CEO of Napster.

Under the terms of the definitive merger agreement, Best Buy will commence a cash tender offer to purchase all of the outstanding shares of Napster common stock for $2.65 per share in cash, with a supporting recommendation from the Napster Board of Directors.

The closing of the tender offer is subject to customary terms and conditions, including the tender of a number of shares that constitutes a majority of Napster's outstanding shares of common stock (on a fully diluted basis) and expiration or termination of the waiting period under the Hart Scott Rodino Antitrust Improvement Act.

The agreement also provides for the parties to effect, subject to customary conditions, a merger to be completed following the completion of the tender offer which would result in all shares not tendered in the tender offer (other than shares held by Best Buy, treasury shares, and shares held by Napster shareholders, if any, who properly exercise appraisal rights) being converted into the right to receive $2.65 per share in cash.

Napster, which recently launched one of the world's largest MP3 stores, had fiscal 2008 revenue of $127.5 million, an increase of 15 per cent over the prior fiscal year; a loss of $16.5 million, an improvement compared with a loss of $36.8 million the prior fiscal year; and positive cash flow for the fiscal year ended March 31, 2008.

Best Buy intends to complete the acquisition using available cash.