(By Rich Bieglmeier) Best Buy Co., Inc. (BBY) is up nearly 20% on word that founder Richard Schulze is ready to cough up "at least $5 billion to $6 billion" to take the big box electronics retailer private. According to Minnesota-based Star- Tribune says Schulze will submit an offer to the board before the Dec. 16 deadline. UPDATE: CNET says the offer is coming tomorrow.
The rumored offer is substantially lower than previous talk of $24 to $26 per share, or as much as $10.9 billion including debt.
As it stands now, BBY has a market cap of $4.87 billion and total debt of $2.01 billion, for a total of $6.88 billion. In other words, if the $6 billion includes debt, the street is overpricing the potential take-private at the moment. If the $5-$6 billion offer doesn't include debt, then at $6 billion plus debt, the take-private price will be $17.32 per share. Shares are fully priced at $5 billion.
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For the record, we think the $5-$6 billion offer doesn't include debt as Schulze said in August he is willing to pay up to $8.8 billion including debt. At the moment, BBY's price is right and fits the budget.
Many investors are probably wondering how to trade tomorrow's offer if reports are accurate. Based on the trading we see in Best Buy option, there is a lot of activity in the call options with strike prices from $15 through $19.
Obviously, Wall Street knows how to do the math and knows $17 and change is about as high as she goes, unless another rides in with a bigger check. We speculate, based on experience and the numbers, that much of the trading with the $17, $18 and $19 strike price is naked or covered call writing; in other words, selling the calls to collect the premium from buyers. It's essentially free money if the deal goes down as reported.
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We see similar activity on the put side of options tables with strike prices from $14 down to $10. Again, it's most likely put writing, selling the options to collect the income for premiums. If Schulze makes the anticipated offer and the deal goes through, it's essentially free money; although, writing puts comes with more risk than calls in our opinion. In the event Best Buy rejects the deal or falls through, then writers will be assigned the stocks with it priced at or below the strike price of choice.
To us, the speculative option trade that makes the most sense is the January 12 call option. As we type, it last traded at $2.50 with only 34 cents premium relative BBY's current price. At $5 billion plus debt, it's close to a break-even trade. At $6 billion plus debt, the stock would be valued at $17.32, minus a deal failure discount of roughly 10%, putting the stock near $15.58ish, in our opinion. At $15.58 – the January 12 call is priced at $3.58 plus or minus a few cents – around 40% upside.
If the deal doesn't materialize, then the stock falls back to its pre-take-private news of $12ish and your money goes bye-bye. According to CNET, we will know for sure tomorrow.