Best Buy Buyout Is No Sure Thing

Shares of Best Buy (BBY) soared 13% on Monday after founder Richard Schulze sent a letter to the retailer’s board requesting permission to explore a buyout of the company.

Schulze’s plan to take the struggling consumer electronics chain private has been swirling for weeks. He owns 20% of the company, and he was dismissed by the company for not being more forthcoming on actions that led to CEO Brian Dunn’s dismissal.

It would be poetic justice. Schulze would get back the company he started, and Best Buy would be able to attempt a turnaround outside of the public limelight, where quarterly disappointments are weighing on both its shareholders and employee morale.

Unfortunately, it won’t be easy to get to the fairy tale ending.

There are Billions at Stake

Schulze’s letter suggests a takeover price between $24 and $26 a share. The buyout would come as sweet relief to investors who saw the stock hit a fresh multiyear low in the mid-teens just two weeks earlier.

He already owns roughly a fifth of the company, but it’s the other 80% — and the company’s net debt — that makes this a tough deal to pull off.

Schulze will need to convince private-equity firms to invest billions to complete the transaction, and these are savvy institutions that don’t buy into something that they can’t sell for more later. Does that sound like Best Buy to you? Yes, the stock has been beaten down over the past couple of years, but most watchers will argue that the markdowns have been warranted.

Best Buy is losing market share to cheaper and nimbler online retailers. Plans to grow sales by offering extended warranties and service plans are backfiring. The push to open smaller Best Buy Mobile stand-alone stores doesn’t seem so great after seeing RadioShack (RSH) tumble while incorporating a similar strategy.

In other words, it will be hard to find financial backers to complete the transaction, especially after private equity firms crack open the company’s books and assess the future of physical retail in a time when CDs, books, games, and DVDs are all going digital.

Bored of Directors

Schulze also needs to get permission from Best Buy’s board to get to the point where potential buyers can begin their due diligence. That’s a requirement under Minnesota corporate law, and it’s not a slam dunk.

The corporate graveyard is loaded with once-proud companies that ignored buyout overtures. Best Buy’s now deceased rival Circuit City rebuffed two different buyout offers before eventually filing for bankruptcy and liquidating its assets.

Throwing out a price in the mid-$20s may have gotten Wall Street’s attention, but it remains to be seen if Schulze can pull that off. The privatization effort will likely require the retailer to take on even more debt, giving it less wiggle room to complete a potential turnaround.

Sensing that there may not be a way out of Best Buy’s downward spiral, potential buyers may simply want to wait to see if they can acquire the chain for less later.

Investors may want to follow suit.

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Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Best Buy and RadioShack.

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