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Best Buy: Schulze May Cut Initial Takeover Bid Of $24 - $26

 November 20, 2012 10:13 AM

(By Mani) As Best Buy Co., Inc. (NYSE: BBY) reports its third quarter numbers today, let's take a look at one of the key catalyst for the shares – a takeover bid from founder Richard Schulze.

However, weaker fundamentals and a drop in shares imply that Schulze may cut the indicated buyout price. Early August, Schulze offered to take Best Buy private for $24to $26 a share, valuing the company as high as $8.8 billion, but the share price has dropped 31 percent since then, and the retailer has reported weak earnings, suggesting that the offer price may be reduced.

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"We'd expect the bid to be below the initial indication of $24-$26 given recent weakness in both the stock price and earnings," Deutsche Bank analyst Mike Baker wrote in a note to clients.

Assuming an $18 price, which would be a 30 percent premium to the closing price of Nov.19, would equate to a $7 billion plus buyout including net debt of $1.5 billion or $6.3 billion after Schulze's equity stake is contributed.

Schulze, who owns 20 percent stake in the consumer electronics chain, has developed a business plan to fix the Best Buy's challenges 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.

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"We'd expect 30% or $1.9b to come from outside equity partners, and 70%, or $4.4 from debt, which includes the current net debt," said Baker who expects a bid from Schulze to buy the company in early to mid December.

Recall that when Schulze and the company agreed to let him conduct due diligence, the time line included 60 days from when the due diligence actually began, which was a week or two after that Aug. 27th announcement, with a 30 day extension if good faith progress is being made.

Schulze, who is working with three private-equity firms, including Cerberus Capital Management on the takeover, may ask Best Buy for another 30 days to conduct due diligence as the initial deadline to review the company's finances nears, Bloomberg reported citing people familiar with the matter.

The deadline may also offer the buyout group the time to see how Best Buy performs during the holiday season, where the retailers get almost 30 percent of their annual sales. Holiday sales this year is expected to increase 4.1 percent to $586.1 billion, according to NRF.

Minnesota-based, Best Buy plans to match online prices of competitors such as Amazon.com (NASDAQ:AMZN) to boost sales in the much-important holiday season. However, it would be a struggle for Best Buy to profit from the $400 million plan as people are used to Amazon's customer service and timely shipping.

Best Buy doesn't have many options either as it is in a do or die situation. Either it needs to compete against giants like Wal-Mart, Inc. (NYSE:WMT), which is planning to test same-day delivery to customers, and online retailers or quit the race.

Consumers are avoiding big box stores such as Best Buy, or just using them as a reference point, to buy the goods online at cheaper deals. 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 indirectly acting as a sales driver for these online retailers.

Challenges are likely to be persist over the next several quarters in key categories including flat-panel TVs, notebooks, CE and entertainment software. These categories still represent more than 50 percent of the company's current sales.

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. James Muehlbauer, the company's finance chief departed recently and was succeeded by Sharon McCollam.

Most importantly, it would eliminate the market and execution risk for shareholders associated with a turnaround while giving the company time and flexibility to take the steps it needs to win back customers and reinvigorate.

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.

Schulze had 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.

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.

"We continue to believe that Schulze will make a formal bid for the company as we don't see any other exit strategy for him and his 20% ownership stake in the company," Baker noted.



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