(By Mani) Finally, the D-Day has come for Best Buy, Inc.
), with Richard Schulze offering to take the consumer electronics retailer for $24 to $26 a share, valuing the company as high as $8.8 billion. The valuation is based on Best Buy's outstanding 339.9 million shares as of June 6.
The takeover rumors has been making the rounds since Schulze, who owns 20 percent of the company, stepped down as Chairman in June after a probe found that he had failed to alert the board's audit committee about allegations of personal misconduct by former Chief Executive Officer Brian Dunn. Dunn resigned in April.
Schulze has developed a business plan to fix the challenges Best Buy faces and has held talks with leading private equity firms over financing the acquisition. He plans to finance the proposed acquisition through a combination of investments from the private equity firms, reinvestment of about $1 billion of his own equity, and debt financing.
Schulze seeks the board's permission to conduct due diligence on the electronics retailer and form a group including private-equity funds and other executives that would make a more complete offer.
However, a move to take Best Buy private won't be as easy as it appears on paper. Analysts say size of a transaction to take the company private should be in excess of $10 billion.
Though the current offer of $24 to $26 represents a premium of 36 percent to 47 percent to Best Buy's Aug.3 closing price of $17.64, it implies a 15 to 9 percent discount to the 52-week high of $28.53.
Despite the bid being higher than the recent trading levels of the company, some long-term investors may think the offer undervalues the potential of the company. They might be expecting at least around $10 billion to give the deal a "fair" tag.
Moreover, Best Buy recently voted to increase the minimum threshold requirement of ownership from 25 percent from 10 percent for an investor to exercise a hostile takeover. As a result, in order to make a hostile bid, Schulz need the support of shareholders, who own at least 5 percent of the company.
Richfield, Minnesota-based Best Buy, which is contending with significant structural limitations in its business model and faces intense competition from online retailers.
The company's comparable store sales, a key metric for retailer performance, have been on the downtrend for seven straight quarters. In the first-quarter of 2012, it fell 5.3 percent and declined 1.8 percent in 2011. The comps rose 0.6 percent in 2010 after a 1.3 percent drop in 2009.
Since June 2009, the company's stock has fallen more than 30 percent, and it has dropped 59 percent in the past five years and 22 percent in the last one year.
Best Buy bore the brunt from the ongoing change in the shopping habits as consumers are avoiding big box stores and are turning online for best deals. They just visit big box stores such as Best Buy and then buy their goods at a cheaper rate from online shopping sites such as Amazon.com, Inc. (NASDAQ:AMZN) and eBay, Inc. (NASDAQ: EBAY).
In addition, many of the sought after consumer gadgets like iPhones and iPads are being offered online by their manufacturers itself thereby removing Best Buy from the equation.
So, Best Buy is not only indirectly acting as a sales driver for these online retailers, but also facing touch competition from other big box retailers such as WalMart (NYSE:WMT) and Target (NYSE:TGT).
The company, which is trying desperately to avoid the fate of former rival Circuit City which liquidated its business in 2009, is closing 50 U.S. big box stores in fiscal 2013, cutting about 400 jobs, changes to the store and operating models.
On the positive side, private equity firms may be attracted to Best Buy's cash flow of about $2 billion a year as they focus on recurring revenues, which would be deployed to repay debt used to fund buyouts. Given the recent slump in sales and profits, it is unclear if private equity firms will be interested in the company.
However, Credit Suisse, Schulze's financial advisor, has informed him that it is highly confident it can arrange the necessary debt financing. Schulze said many former Best Buy executives, including former CEO Brad Anderson and former President and COO Allen Lenzmeier, are also interested in rejoining the company.
Meanwhile, going private seem to be the best option for Best Buy in the current scenario as further delay would cause additional loss of both shareholder value and talented executives who are now uncertain of the company's future. Most importantly, it would eliminate the market and execution risk for shareholders associated with a turnaround under an interim CEO, while giving the company the time and flexibility to take the steps it needs to win back customers and reinvigorate.
"There is no question that now is the moment of truth for Best Buy and that immediate and substantial changes are needed for the company to return to its market-leading ways. After assessing all of my options, it is my strong belief that Best Buy's best chance for renewed success is to implement with urgency the necessary changes as a private company," Schulze said in a statement.
Schulze spent 46 years with Best Buy and its predecessor company, Sound of Music, after founding the company in 1966. He served as the company's Chief Executive Officer, Chairman and a director until 2002. He continued in the role of Chairman and a director from 2002 until resigning from the board in June 2012.
During the period from 1991 through 2009 when Schulze, Brad Anderson and Allen Lenzmeier worked together in executive leadership positions at Best Buy, the company's revenues increased from about $900 million to over $45 billion, and earnings before interest, taxes, depreciation and amortization (EBITDA) surged from approximately $30 million to $2.9 billion. During the period, shareholders enjoyed a total return in excess of 16,000 percent.
Shares of Best Buy surged as much as 22 percent to $21.60, which was well below the current offer range, implying that they weren't expecting much higher price and want to exit their positions quickly.