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Best Buy, Founder Schulze Reach ‘Due Diligence’ Agreement

27 Aug, 2012 By: Erik Gruenwedel

Best Buy Co. Aug. 27 said it has reached an agreement with founder Richard Schulze under which he will be granted access to certain due diligence information and permission to form an investment group with private equity sponsors in making a proposal to acquire the consumer electronics retail chain.

The news sent shares of Best Buy up about 7% in midmorning trading.

Schulze, who owns 20.1% of Best Buy shares, has stated interest in a leverage buyout that would return the chain to private ownership valued at more than $8 billion. That offer amounted to $24 to $26 per share. The proposal stalled when both sides couldn't agree to language in the due diligence agreement. The former chairman reportedly was pleased that an agreement was reached allowing him to conduct the due diligence he had sought, according to a Best Buy statement.

Due diligence allows a prospective buyer to look at a company’s select financial statements. Schulze is expected to produce a buyout offer within 60 days after the due diligence period begins — a time period that could be extended under certain circumstances. The agreement also includes a waiver of Minnesota law allowing Schulze to work with his private equity partners to develop a proposal.

Should the Best Buy board reject Schulze’s initial proposal, he would have the opportunity to present a second offer beginning in January 2013. The board would have 30 days to review the second proposal before Schulze would have the opportunity to take his offer directly to shareholders at the 2013 annual meeting or at a special meeting.

If Schulze is unsuccessful in getting his offers approved by the board or by the shareholders, he has agreed not to pursue an acquisition until the expiration of the one-year term of the agreement.

Best Buy agreed to offer Schulze two board seats, proportionate to his share ownership. If he presents an offer to shareholders or if he materially violates the standstill provisions of the cooperation agreement, he no longer will be allowed to obtain the two board seats.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, remains skeptical that should Schulze can turnaround Best Buy should he be successful in acquiring the chain.

“Schulze … was its board chairman until June 2012, and somehow neglected to mention or implement his turnaround strategy while associated with the company, notwithstanding his control over executive appointments,” Pachter wrote in an Aug. 27 note.  “We find it hard to believe that Schulze developed a strategy only since his departure from Best Buy’s board, and we expect that potential equity partners will share our skepticism.”

Pachter added that Schulze did little to address the threat of Internet retailer share gains — notably Amazon — while he was on the board.

Indeed, Best Buy saw its profit plummet more than 90% during its most recent fiscal period.

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