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Best Buy Founder Offers to Buy CE Retailer

6 Aug, 2012 By: Erik Gruenwedel

Best Buy Co. Aug. 6 said founder and former chairman Richard Schultze sent the board of directors a letter offering to acquire all outstanding common shares of the consumer electronics retailer.

Schultze, who owns more than 20% of Best Buy, said he would pay from $24 to $26 per share, according to a statement. The offer values Best Buy at about $8.5 billion and a 40% premium over its closing share price Aug. 3.

Best Buy’s board said it would review the letter consistent with its fiduciary duties, in consultation with its financial and legal advisors. Best Buy said its board will evaluate the proposal carefully and would pursue the best course for its shareholders.

The No. 1 CE retailer represents a conundrum to investors in that it is profitable while operating in a market that is increasingly price-sensitive and ultra competitive. In fact, many analysts contend Best Buy has become nothing more than a consumer electronics showroom for cheaper alternatives such as Amazon and other e-commerce sites.

Best Buy is currently headed by interim CEO Mike Mikan, who has pledged to right the retailer. Former CEO Brian Dunn resigned earlier this year when an internal audit committee released a report critical of his personal relationship with a female employee. The committee also rebuked Schulze for not disclosing his personal knowledge of Dunn’s affair.

“Best Buy faces headwinds around same-store sales, market share and competition that are more pronounced than for other retailers with similar leverage,” Fitch analysts Kellie Geressy-Nilsen and Monica Aggarwal wrote in a June note discussing the specter of a buyout.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said Schulze would have to raise at least $3 billion in equity in order to complete the deal — a significant challenge, as he thinks lenders would be reluctant to advance more than two-time pre-tax earnings. 

Pachter said private equity investors would have to believe they have a reasonable chance of generating a 100% return on their investment, meaning that they would have to believe that Best Buy could be taken private for $8 billion and then sold for $11 billion or more in the next three to four years.

"We do not believe that is a plausible scenario and think that private equity investment will be hard to come by," Pachter wrote in a note. 

The analyst said Best Buy's store traffic is driven by a declining consumer electronics business, with its growth (primarily computing and mobile phones) yielding lower-than-expected results as store traffic continues to slow. Pachter said same-store sales and margins are likely to continue to decline, compounded by increased overhead expenses.

"This is an unhealthy combination," Pachter wrote. "We believe that Best Buy’s store-level economics place it at approximately a 10% price disadvantage to online retailers, and we believe that increasingly sophisticated consumers with mobile Internet access will value lower prices over service, ultimately making Best Buy’s big-box [stores] obsolete."

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