Best Buy: Analyzing the Buyout Scenario

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At its peak at nearly $57 in 2006, Best Buy (NYSE: BBY) had a market capitalization of just over $19 billion. Most recently, Best Buy shares dropped rapidly, hovering above the $12-level and a market capitalization of $4.15 billion.

Market capitalization values matter, when considering what the company is worth if taken private. Founder and former CEO Richard Schulze said in the summer that he wants to privatize the company. Markets are skeptical: shares are hovering near yearly lows. The upside for investors for an “easy” gain is being threatened, as time passes.

Risk Factor: Time

Time is working against Best Buy for two reasons. First, the company needs to manage leases for poor-performing stores, which due for renewal next year. Online retailers will likely report spectacular sales growth year-over-year. This will overshadow the decline in sales at all traditional retailers. Investors already expect strong sales for Newegg, Amazon.com (NASDAQ: AMZN), and eBay (NASDAQ: EBAY). Although revenue for eBay will grow revenue from PayPal, reducing online shopping demand risks, investors are enamored with Amazon. Amazon trades at a forward price of profit of over 70, and rightfully so. The company was ranked the top e-retailer website in 2012 by ForeSee. Best Buy is valued at a price of profit of just 5.

Another reason time is working against Best Buy is that the company reports holiday sales on January 11 2013. Given lukewarm interest in PC-based computers and declining demand in LCD TVs, investors should not expect strong results. On the upside, mobile device sales at Best Buy and at its smaller-format mobile stores should still perform well. At its current valuation, investors are not anticipating mobile device sales to offset weakness in televisions or computers.

By comparison, RadioShack’s focus on phone and tablet sales are hurting margins. This does not support a positive view that Best Buy’s mobile shop strategy will improve its profits.

Privatization - Timing

Schulze has between February 1 and February 28 2013 to make a bid for the company. Back in the summer, when a deal first emerged, Schulze said he could bid $24-26 for the company.

Additional Risks

Wall Street Journal named Best Buy as one of the retailers facing a “do or die” in 2013. RadioShack (NYSE: RSH) was also named. “Showrooming” a name coined to describe the 25 percent of shoppers who would examine a product but buy on an online store, illustrates the challenges Best Buy is facing.

Sales Comparison

Quarterly sales at Amazon.com outpaced both Best Buy and RadioShack over the last few years. The latter two companies failed to grow sales:

<img src="/media/images/user_15008/bby20122812_1_large.JPG" />

Data Source: Kapitall.com

Conclusion

There is considerable risk in buying Best Buy based on the expectation that the company will be privatized. The market is not pricing in this event taking place. Financing a deal may fail, which would all but ensure Best Buy remains a public company. Investors should continue to look for evidence that Schulze will be able to gain support for his plans. This would mean shares are considerably undervalued, and that a take-out price would be a healthy premium above the current stock price of Best Buy.


chrispycrunch has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and RadioShack and is short RadioShack. Motley Fool newsletter services recommend Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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