(By Rich Bieglmeier) Best Buy Co. Inc. (BBY) is up around 70 cents despite reports from Reuters that Best Buy founder Richard Schulze and with private equity firms are investigating BBY's financials. The news agency says it is early in the game, but it could lead to a "potential $11 billion buyout, according to people familiar with the matter."
As it stands now, BBY has a market cap of $5.87 billion according to Yahoo. An $11 billion offer would be 87.3% above the electronics company's value as we type. Do the math, and it works out to $32.66 per share. Earlier, Schulze suggested that he'd be willing to pay $24 - $26, the difference includes debt.
Wall Street's subdued reaction tells investors that the Street doesn't believe the deal will get done. Instead, BBY shares continue to languish near their intraday, 52-week low of 16.25, and their yearly and last night's closing low of $16.97.
At this point, charts and fundamentals are meaningless for investors until Schulze makes an offer or goes away. The Reuters' article points out that private-equity firms signed the non-disclosure forms sometime in mid-September. Part of the agreement between Schulze and the board is that he will make an offer within a 60-day period or face a "standstill period," which is an agreement where the acquirer (Schulze) agrees not to buy any more of BBY in exchange for some compensation.
iStock doesn't know when the 60-day clock started ticking, but let's just put the finish line at the end of 2012. Investors could consider utilizing a bull call spread with options to take advantage of the situation.
To create some margin for error, let's look at the January 2013 call options. Hopefully, that encompasses the 60-day window for an offer to emerge. We will take the average of Richard Schulze's previous price points of $24-$26 and use $25 as our price tag.
Investors can implement the strategy by buying January 2013 BBY call options with a $20 strike price. The 20 call last traded for $1.27. The next step is to sell an equal amount of October 25 calls, which just traded for 29 cents. Simultaneously buying and selling call options creates a net debit of about 98 cents. That's the max risk.
If Best Buy is bought out at $24, then the max gain is roughly $3. At $25 or higher, and the debit spread trade puts approximately $4 in your pocket. The break even point is around $21.
Best Buy's problems are well documented. Sales and profits are falling as consumers "showroom" products in-store, and then head to the internet to purchase their electronic gadget(s) of choice for less. If Schulze and his team of private-equity firms "stand still," then Best Buy shares are likely to break support at $17 and continue on their downward path, maybe to $12.50 in our opinion. While options are risky, iStock's suggested bull call spread could prove offer far less downside and close to half of the upside.