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Coinstar To Acquire Amusement Factory, One Of The Nation's Largest Bulk Vending Operations

Posted On: 11/20/2005

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BELLEVUE, WA -- Already the United States' largest operator with approximately 47,000 locations in all 50 states, Coinstar Inc. will put even greater distance between itself and its next-largest competitor with the planned purchase of The Amusement Factory LLC later this year. The Amusement Factory is the nation's second largest operator with more than 14,000 locations.

Coinstar has signed a definitive agreement to purchase substantially all of the operators' assets for approximately $36 million in shares of Coinstar common stock.

Specializing in bulk vending, cranes and kiddie rides, The Amusement Factory (Van Nuys, CA), reported gross revenues of $60 million in 2004. Coinstar will not assume any of The Amusement Factory's existing debt. Officials said the purchase price was based in part on a standard evaluation formula that includes a five-times-EBIDTA basis.

The resulting company will offer location customers the efficiency of dealing with a single vendor for multiple machine types, and increase Coinstar's purchasing power and market clout considerably. AF is Coinstar's second major acquisition following the 2004 purchase of Denver-based American Coin Merchandising Inc. (dba Sugarloaf) for $235 million in cash. In 2003, ACMI purchased New York-based Folz Vending, a nationwide bulk specialist with $50 million in annual revenues, for an undisclosed sum.

The purchase of The Amusement Factory is expected to close in mid to late fourth quarter of this year. TAF founder and CEO Fred Simon will remain president of the acquired company and Randy Fagundo will continue to serve as president of ACMI. The two companies are expected to merge logistical support and administration after a period of independent operations. A single bulk vending entity will probably emerge; Simon appears slated to head that division.

Coinstar and The Amusement Factory have an estimated 3,000 overlapping locations. TAF's prime sites include Wal-Mart and Kroger Co. Following the deal's completion, the combined management expects to boost "route density" by placing more Coinstar and ACMI machines in TAF locations, and likewise more of TAF's equipment in Coinstar/ACMI locations. "Cross-selling was a big part of why Coinstar acquired ACMI," said Fagundo. "That same strategy obviously applies with this deal as well." Simon said the two men had been discussing a possible merger since 2001, well before Coinstar's acquisition of ACMI.

Both Coinstar and The Amusement Factory have extensive field services operations, including staff, regional offices and warehouse facilities. Cost savings will accrue from facility consolidation, improved route servicing and enhanced logistics management to boost efficiency and eliminate redundancies, officials said. Field integration of the two companies is expected to start in the second quarter of 2006 and be substantially complete by the end of next year. Fagundo and Simon said they will combine the best practices from both companies.

Coinstar expects this transaction to be slightly accretive to Adjusted Earnings Per Share within the first 12 months, excluding the effects of the amortization of intangible assets. Coinstar will obtain an independent valuation of certain of The Amusement Factory's tangible and intangible assets which will enable Coinstar to determine purchase price allocations, including amounts assigned to inventories, intangible assets and goodwill. As a result, reported GAAP earnings per share will be impacted by the noncash accounting charges related to such amortization of intangible assets.

The size of Coinstar's and TAF's combined operations means the new entity will achieve unprecedented scale for a non-arcade chain amusements/bulk operation. Yet officials believe Coinstar/ACMI has blended the best of a large national firm -- economies of scale, world-class business management and financial clout -- with the zealous, local service that keeps locations happy and profitable. Functions such as purchasing, merchandising and accounting are handled at the national headquarters. Fagundo said ACMI currently maintains 37 offices across the country, but they are organized as independent business units. Regional and general managers are compensated based on the profitability of their individual unit, and route managers are paid on commission.

Fagundo and Simon said they would continue to support a range of industry manufacturers and plush, prize and merchandise suppliers. No determination has been made yet as to whether the company would institute a route-wide hike in vend prices.

Coinstar launched in the San Francisco Bay area the early 1990s with self-service coin-to-cash machines, charging an 8.9% fee on each transaction. Today some of its kiosks also vend prepaid card services, or allow the purchase of gift cards or eCertificates from national retailers, without incurring a coin-counting fee.