Investors speculate on Best Buy's buyout potential

Black Friday line
Shoppers lined up around the outside of the Best Buy store in Baxter, Minn., at 11 p.m. Thursday, Nov. 24, 2011. Best Buy recently announced the closing of 50 of its some 1,100 big-box stores as part of an effort to cut costs by about $800 million. As stores close, 2,000 to 3,000 employees — or more — could lose their jobs.
AP Photo/Brainerd Dispatch, Steve Kohls

With stock price down by more than half over the past two years, Best Buy's investors are debating whether the company is ripe to be acquired in a leveraged buyout.

Best Buy is a beat-up company with numerous problems and challenges. Its CEO just left amid an investigation of his personal conduct. Sales and profits are slipping. Competition from rivals like Walmart and is rising.

The question is whether a private equity firm would be interested in acquiring Best Buy. A private equity firm typically uses some of its own investors' money and additional borrowed funds to buy a struggling company. The playbook then calls for cutting jobs and weak operations to revive the enterprise, and finally selling the company's stock in a new public offering for a big profit.

Morningstar, the investment analysis shop in Chicago, has had Best Buy on its buyout watch list for months.

Create a More Connected Minnesota

MPR News is your trusted resource for the news you need. With your support, MPR News brings accessible, courageous journalism and authentic conversation to everyone - free of paywalls and barriers. Your gift makes a difference.

"Given the pressure the company faces, you know it may be an attractive opportunity for a leverage buyout company," said Morningstar retail analyst R.J. Hottovy. "Under private equity leadership, the company may be in a better position to streamline its business."

Best Buy has announced the closing of 50 of its some 1,100 big-box stores as part of an effort to cut costs by about $800 million. As stores close, 2,000 to 3,000 employees — or more — could lose their jobs.


But a private equity firm could be much more aggressive in transforming the business and downsizing and closing stores, Hottovy said.

Mall of America
Crowds of Black Friday shoppers attempt to push their way through security staff moments after the doors opened outside of Best Buy at the Mall of America in Bloomington, Minn., early Friday Nov. 25, 2011. With a battered stock price, Best Buy's investors are debating whether the company is ripe to be acquired in a leveraged buyout.
AP Photo/The Minnesota Daily, Mark Vancleave

"There's huge opportunity to come in and go above and beyond what the company has already announced in terms of its transformational strategy," Hottovy said.

Best Buy's battered stock price would make the company a cheaper acquisition, but still a hefty price tag — Hottovy figures about $12 billion. That would likely require big loans and multiple buyers, he said, as well as the backing of Best Buy founder Richard Schulze, who owns about a fifth of Best Buy's stock.

"With that kind of position, I think he could have veto power over a deal," Hottovy said. "You'd have to have him on board for this type of transaction to make it happen. And it's just unclear at this point whether or not this is the movement he sees for the company."

Despite its troubles, Best But can still generate about $1 billion in annual profits from its operations. That cash could cover payments on loans used to finance a buyout.

That's one thing that catches the attention of potential buyers, Edward Jones retail analyst Matt Arnold said.

"There's big cash generation still being achieved by Best Buy," Arnold said. "There's not that much debt. So, there's opportunity for a private equity outfit to potentially lever up the company and try to buy it that way, using a lot of debt."

But Arnold is one of many analysts who doubt a deal will get done.

"There will always be plenty of rumors within retailing about leveraged buyouts, but there's a pretty small percent that actually come to fruition," he said.

A New York hedge fund, Greenlight Capital, has been increasing its holdings of Best Buy stock. But the fund holds only about two percent of Best Buy's shares. Greenlight would not comment on its interest in Best Buy.


Wedbush Securities research analyst Michael Pachter believes Best Buy has too much going against it to attract a buyer.

Brian Dunn
Brian Dunn, CEO of Best Buy, speaks at a media event in 2009. Dunn recently resigned over an investigation into his personal conduct.
AP Photo/Mark Lennihan

"If it were an easy, obvious fix they would be very attractive to private equity," Pachter said. "Private equity has no trouble buying a company that is a mess and turning it around and fixing. But these guys aren't a mess because they don't run their stores well — they do."

Best Buy is struggling, Pachter said, because its business model is out of sync with the times. The retailer's stores are too big and costly to run, as more consumer electronics sales shift to the Internet.

Because of its stores' operating costs, Pachter estimates Best Buy has to set prices about ten percent higher than they otherwise would be. That puts Best Buy at a great disadvantage against online-only retailers.

Pachter expects that within five years Internet retailers could take away ten percent of Best Buy's sales and perhaps wipe out its profits. He also said Best Buy's sales losses could worsen as younger generations age and become more voracious consumers.

"In ten years they will probably have lost 30 or 35 percent of the market under 40," Pachter said. "That's the problem. And it's not going to get any better. They're not going to make up for it by selling more stuff to the guys in their 60s and 70s."

Prachter is not alone in concluding Best Buy has too much baggage to attract a buyer.

"Anything is possible but I don't believe it's going to happen," said retail consultant Howard Davidowitz.

"I just don't see private equity taking this on," Davidowitz said. "It's too much management work to do, too iffy. And I can't see any strategic buyers who would be interested in it. You've really got to reinvent the company.'"

It seems that reinvention will be led by whomever Best Buy's board picks to replace Brian Dunn as CEO. The board expects it will be six to nine months before it names a new, permanent CEO.