Best Buy founder proposes taking retailer private

Aug 06, 2012, 1:16 PM EDT
REUTERS/Shannon Stapleton/Files

* Schulze offers $24-$26 a share for Best Buy
* Many on Wall Street deem offer "inadequate"
* Says talked with former CEO, COO about coming back
* Shares up 12 pct but still well below proposed price range
By Dhanya Skariachan
Aug 6 (Reuters) - Best Buy Co Inc founder RichardSchulze on Monday offered to take the struggling U.S.electronics retailer private in what could be the biggestleveraged buyout of the year.
The offer comes less than three months after Schulze wasforced out as chairman for failing to report allegations ofpersonal misconduct by the then-CEO.
The deal values the world's largest consumer electronicschain at $8.16 billion to $8.84 billion, or $24 to $26 a share-- a price tag that many on Wall Street deemed inadequate.
Best Buy shares were up 11.5 percent at $19.67 on Mondayafternoon, still well below the proposed offer price range,reflecting investor skepticism that the deal would get done.
"It is a different conversation if it is at least $30 ashare and you have got your equity financing lined up and youhave got your debt financing lined up. That is whereshareholders, I think, might say 'You know what, let's just takethe money and run,'" said Anthony Chukumba, analyst at BB&TCapital Markets. BB&T Capital Markets expects to receive orintends to seek compensation for investment banking servicesfrom Best Buy in the next three months.
The offer by the former Best Buy chairman, who owns 20.1percent of its stock, represents a premium of 36 to 47 percentover the stock's closing price of $17.64 on Friday.
Best Buy has been closing stores, cutting jobs and tryingout a new store format to try to improve its business.
The company, a bellwether for the consumer electronicsindustry, has also been criticized for being too slow to reactto a changing retail world, where some shoppers use Best Buy asa "showroom" to try out electronics and then buy the same itemsat lower prices online or elsewhere.
It has posted declines in same-store sales in seven of thelast eight quarters.
"My feeling is that being private would give them more of anopportunity to experiment, try new things outside the glare ofquarterly reports," said New York-based retail consultant Walter Loeb.
Schulze, who founded the retailer under the name Sound ofMusic in 1966, said he would finance the deal through acombination of private equity investment, about $1 billion ofhis own equity, and debt.
Including the assumption of Best Buy's debt, the total valuefor the company would be $10.9 billion, making it the year'sbiggest leveraged buyout so far, according to Thomson Reutersdata.
Schulze said he had held talks with top private equity firmsabout his proposal, but did not name them.
Credit Suisse, Schulze's financial adviser, has said it ishighly confident it can arrange the necessary debt financing,Schulze said in a letter to Best Buy Chairman Hatim Tyabji.
Schulze resigned from Best Buy's board in June and latersaid he was exploring options for his ownership stake. He lostthe chairmanship after a probe by a board committee found he hadfailed to tell the board about allegations of personalmisconduct by then-CEO Brian Dunn.
The company, which named board member Mike Mikan as interimCEO, is now searching for a permanent replacement for Dunn.
Schulze said on Monday he was making his offer public afterrepeated requests to the company for the information he needs toperform due diligence on the proposal.
Best Buy said its board would evaluate Schulze's offercarefully and "pursue the best course for shareholders."
Schulze said he had held talks with past Best Buy executiveswho were interested in rejoining the company, including formerCEO Brad Anderson and former Chief Operating Officer AllenLenzmeier.
Schulze does not plan to take a management role if his offeris accepted, two sources familiar with the matter told Reuterson Monday.
Chukumba said Schulze's decision to avoid holding amanagement executive role would be viewed positively, but he wasskeptical about bringing in former Best Buy executives to runthe retailer.
"Their track record is good, but to me that was a differenttime and a different place. When Brad Anderson was running thecompany, Amazon was not on anyone's radar screen. When BradAnderson was running the company, flat panel TVs came out andeverybody wanted one," Chukumba said.
Investors including Connor Browne, portfolio manager of theThornburg Value Fund which owns Best Buy shares, have toldReuters that they wanted to see a fresh face at the helm of theretailer, which has lost many of its customers to Inc and Wal-Mart Stores Inc.
"I want some new guys in there, some new guys thatunderstand what is really going on in retail, not the guys thatessentially positioned Best Buy to fail, like they are rightnow, who in many respects did not anticipate this change," saidBrian Sozzi, chief equities analyst with NBG Productions.
Sozzi also said Schulze's offer seemed low compared withestimates he had heard of the company fetching $31 to $33 ashare.
Credit Suisse is serving as financial adviser to Schulze,while Shearman & Sterling LLP is legal counsel. Best Buy'sfinancial advisers are Goldman, Sachs & Co and J.P. Morgan.Simpson Thacher & Bartlett LLP is serving as legal adviser tothe retailer.