Founder offers to take troubled Best Buy private

Mon Aug 6, 2012 7:19pm EDT

Best Buy logo is seen at a Best Buy store in Toronto in this April 19, 2011 file photo. REUTERS/Mark Blinch/Files

Best Buy logo is seen at a Best Buy store in Toronto in this April 19, 2011 file photo.

Credit: Reuters/Mark Blinch/Files

Related Video

Related Topics

(Reuters) - Best Buy Co Inc (BBY.N) founder Richard Schulze on Monday made a bid to take the struggling U.S. electronics retailer private just months after being forced out as chairman.

If Schulze succeeds, it could result in the world's biggest leveraged buyout of the year. But early reaction suggests he faces an uphill battle in taking his once wildly successful company in a new direction.

The deal values the world's largest consumer electronics chain at $8.16 billion to $8.84 billion, or $24 to $26 a share -- an offer many on Wall Street deemed inadequate. Schulze owns 20.1 percent of the company.

Best Buy stock's closed up 13.3 percent at $19.99 on Monday, reflecting investor skepticism that the deal would get done.

"It is a different conversation if it is at least $30 a share and you have got your equity financing lined up and you have got your debt financing lined up. That is where shareholders might say 'You know what, let's just take the money and run,'" said Anthony Chukumba with BB&T Capital Markets.

Schulze's offer represents a premium of as much as 47 percent over the stock's Friday close of $17.64. Including the assumption of Best Buy's debt, the total value for the company would be $10.9 billion, making it the year's biggest leveraged buyout so far. Schulze would also commit $1 billion of his own equity as part of the deal.

Schulze said he had held talks with top private equity firms about his proposal, but did not name them. Credit Suisse, Schulze's financial adviser, has said it is highly confident it can arrange the necessary debt financing, Schulze said in a letter to Best Buy Chairman Hatim Tyabji.

The proposal is already considered highly conditional given that the debt financing is not committed and that the identity of equity sponsors has not been revealed, according to a person close to the situation.

The three main credit rating agencies, meanwhile, late on Monday raised doubts about the impact of a deal on Best Buy's financial strength. Standard & Poor's and Fitch Ratings cut their respective corporate ratings by one notch to BB-plus from BBB-minus and indicated further downgrades were possible.

Moody's Investors Service reaffirmed its Baa2 rating, but changed the outlook to a more negative "developing" from "stable," citing concerns that a buyout will increase leverage.

Schulze has been exploring options for his ownership stake in Best Buy since he resigned from the board in June and was holding talks with the board.

He lost the chairmanship after a probe by a board committee found he had failed to tell the board about allegations of personal misconduct by then-CEO Brian Dunn.

The former Best Buy chairman would require board approval to permit him and his potential private equity partners to form a group to make a firm proposal without running afoul of anti-takeover statutes in its home state of Minnesota.

Under Minnesota law, a shareholder who takes a significant stake without prior board approval must wait four years from the date of the investment before a deal can be executed.

If Schulze forms a group, his partners could be deemed to be new acquirers of his shares, and the group would therefore be subject to the four-year waiting period, another person familiar with the matter told Reuters.

OUTSIDE THE GLARE

Best Buy has been closing stores, cutting jobs and trying out a new store format to improve business. It has faced criticism for being too slow to react to a changing retail world, where many use Best Buy as a "showroom" to try out gadgets and then buy them online or elsewhere for less.

"My feeling is that being private would give them more of an opportunity to experiment, try new things outside the glare of quarterly reports," said New York-based retail consultant Walter Loeb.

Schulze said on Monday he was making his offer public after repeated requests to the company for the information he needs to perform due diligence on the proposal.

Best Buy said its board would evaluate Schulze's offer carefully and "pursue the best course for shareholders."

Schulze does not plan to take a management role if his offer is accepted, two sources familiar with the matter told Reuters on Monday. But Schulze said he had held talks with past Best Buy executives who were interested in rejoining the company, including former CEO Brad Anderson and former chief operating officer Allen Lenzmeier, a move that drew some skepticism.

"Their track record is good, but to me that was a different time and a different place. When Brad Anderson was running the company, Amazon was not on anyone's radar screen. When Brad Anderson was running the company, flat panel TVs came out and everybody wanted one," Chukumba said.

Investors including Connor Browne, portfolio manager of the Thornburg Value Fund which owns Best Buy shares, have told Reuters that they wanted to see a fresh face at the helm of the retailer, which has lost many of its customers to Amazon.com Inc (AMZN.O) and Wal-Mart Stores Inc (WMT.N).

"I want some new guys in there, some new guys that understand what is really going on in retail, not the guys that essentially positioned Best Buy to fail, like they are right now, who in many respects did not anticipate this change," said Brian Sozzi, chief equities analyst with NBG Productions.

Sozzi also said Schulze's offer seemed low compared with estimates he had heard of Best Buy fetching $31 to $33 a share.

Credit Suisse is serving as financial adviser to Schulze, while Shearman & Sterling LLP is legal counsel. Best Buy's financial advisers are Goldman, Sachs & Co and J.P. Morgan. Simpson Thacher & Bartlett LLP is serving as legal adviser to the retailer.

(Reporting by Dhanya Skariachan, Nadia Damouni and Phil Wahba in New York and Jessica Wohl in Chicago; Additional reporting by Joe Giannone in New York; editing by Jeffrey Benkoe, Sofina Mirza-Reid, John Wallace, Matthew Lewis and M.D. Golan)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (7)
moxsee wrote:
Richard Schulze. Howard Schultz. Oddly similar with a corporate story to match.

Guess we should go ahead and publish that book about the great corporate comeback of Best Buy. Just a matter of time if BB goes seemingly private. Long way to go and should be entertaining to watch.

Aug 06, 2012 9:06am EDT  --  Report as abuse
moxsee wrote:
Bonus two cents, whenever the founder and CEO leaves the company tanks. APPL … your next. The products are all modifications from Steve Jobs’ creativity. Innovation, leadership at Apple are gone. Best Buy, Starbucks it happens to the best. The slow decline to private equity should be a classic study in business life cycles.

Aug 06, 2012 9:23am EDT  --  Report as abuse
bdkennedy1 wrote:
Best Buy has been a rip off ever since CompUSA went bankrupt.

Aug 06, 2012 11:22am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.