Best Buy founder wants to take company private

Best Buy
Best Buy store in West St. Paul, Minn. Best Buy founder Schulze said Monday, Aug. 6, 2012, that he wants to take the electronics retailer private by buying up all of its shares he doesn't already own in a deal that values the company at as much as $8.84 billion.
MPR Photo/Nikki Tundel

Best Buy's share price closed up 13 percent today after company founder Richard Schulze publicly unveiled his long-expected bid to buy the firm back.

Stiff competition and a CEO scandal have recently cast doubt on the company's future. Now the question is whether Schulze can pull off a deal to win back and revive the retail empire he created.

In a letter made public today, Schulze said he was prepared to offer up to $26 a share for the 80 percent of the company he doesn't already own. The proposal values the company at between $8 billion and $9 billion.

In his letter Schulze said the financing involves debt, his own $1 billion stake in the company and investments from "several premier private equity firms with deep experience in retail who are interested in a possible acquisition of Best Buy."

The letter also says top executives from the company's salad days are interested in joining the effort.

Best Buy called the proposal "highly conditional."

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MIXED REACTIONS FROM ANALYSTS

Schulze did not respond to an inquiry about his bid. But admirers say the 71-year-old founder is now the company's best hope for the future.

"Schulze is one of those guys who's gone through a number of near-death experiences in his life and business," said Howard Davidowitz, a retail consultant in New York City. "He understands it. He's a survivor."

Davidowitz said he thinks Schulze alone has the experience and the insight to revive Best Buy. "You need that kind of entrepreneurial intellect to fix a business like this, because all the professionals know is what not to do," Davidowitz said.

Others aren't so sure. Pointing to bookstores, music retailers and movie rental outlets, skeptics say the Internet is changing the game, and Best Buy is losing market share to lower-priced rivals like Amazon.com and Wal-Mart.

"They just can't possibly gain share," said Michael Pachter, a Los Angeles-based analyst with Wedbush Securities. "They're going to always lose. It's going to decline forever, until they can't afford it anymore. And if Best Buy were to go private, and take on a lot of debt, then their demise would accelerate."

Pachter is one of many doubters questioning whether a deal could be done. Best Buy already had credit ratings that are just a notch or two above junk status. Today, two ratings agencies cut their ratings on Best Buy to below investment grade citing the prospect of more borrowing to pay for a buyout. That could drive up interest payments on any debt.

But Pachter doubts bankers would even be interested in such a highly leveraged transaction in a cut-throat business environment — at least without billions more from private equity investors thrown into the deal.

Richard Schulze
Best Buy founder Richard Schulze, seen here in a file photo, said Monday, Aug. 6, 2012, that he wants to take the electronics retailer private by buying up all of its shares he doesn't already own in a deal that values the company at as much as $8.84 billion.
MPR Photo/Tom Weber

"Internet retail is going to ultimately put all specialty retail out of business, except those that have a competitive advantage," Pachter said.

And Pachter doesn't think consumer electronics, like smart phones and televisions, have many of those competitive advantages to offer a company like Best Buy.

Pachter also said that new distribution centers under construction by Amazon.com, in New Jersey and California, could make it even tougher by offering same-day delivery in the huge markets on the east and west coasts. Those are markets Best Buy can't live without, Pachter said.

But others say Schulze has a shot. Consultant Howard Davidowitz said Best Buy could enter into agreements with its suppliers for Best Buy-only products that give the chain a competitive advantage.

"The trends are all bad. We all understand Amazon. There's no question the threat is enormous. No one is diminishing that," Davidowitz said. "But who is to stop Best Buy from making exclusive deals with manufacturers? They're big enough to do that. Who's to stop them from adding on new and different products that compliment the assortment they have? No one!"

Morningstar analyst R.J. Hottovy points out Schulze is pushing roughly a $1 billion of his own holdings onto the table. Putting that much of his own skin in the game, they say, could attract billions more in private equity and guarantee a bank loan.

"I do think this is at least a starting point," Hottovy said. "I do think this represents a real offer. I think he wouldn't be out there unless there was some sort of commitment from both private equity companies interested in being part of the deal, as well as lenders who'd be willing to backstop this deal."

WHAT'S NEXT?

Schulze's proposal is in a holding pattern right now. Business law in Minnesota, where the company is incorporated, hobbles takeovers unless the company's management is on board. Schulze is effectively seeking Best Buy's permission to form a buyout group and get a look at the company's books. Best Buy says it will consider the offer in, "due course."

After a day of considering, investors appeared decidedly skeptical that Schulze will be able to pull off a deal. The company's share price zoomed as high as $21.60 in morning trading, a gain of 22 percent. But the stock never came any closer to $24, the lower end of Schulze's offer. And it floated down to close at $19.99, well shy of what Schulze said he is prepared to offer.