Stock Market to Best Buy Founder: Try Again
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When a buyout offer is announced, the shares of the publicly traded company are generally expected to rise close to the price being tendered. This has not happened with Best Buy (NYSE: BBY) and the bid of Richard Schulze, its founder, to take the embattled electronic retail chain private at a price range of $24 to $26 a share. At present, Best Buy is trading slightly over $19 a share, falling yet again in another day of market action after the offer was made.
Best Buy has fallen more than 20% over the last six months of market action. Competition from Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) has been devastating for the company, and thus the share price. Best Buy is about 15% from its 52-week low. It is not just Best Buy as the retail electronic store sector is suffering: Radio Shack and HH Gregg are all trading near year lows, too.
There has been a combination of blows delivered by Amazon, Apple, Wal-Mart and Target that have floored retail electronic chain stores. Consumer electronics sales is among the top items that are gaining the most in sales for Amazon. Big Box retailers such as Target and Wal-Mart offer most of what the average customer needs in electronic gear. For the high end user, there is nothing at Best Buy to even compare with the Genius Bar experience and cachet' of shopping at an Apple retail store.
Schulze's proposal for reversing the fortune's of Best Buy have changes that would, hopefully, allow it to compete with Amazon in the online realm and with Apple for the in-store majesty. Schulze is adamantly opposed to Best Buy's current plans that entail closing down a large number of retail stores. According to one article, he "...believes the company's plans to downsize its retail footprint will ultimately put it out of business."
About this desire of Schulze to rebuild the retail store experience, one analyst recently wrote about these aspirations of Best Buy rebounding against this array of adversaries, that "The brick and mortar business model is broken and cannot be fixed. Retailers that do not sell perishable goods simply cannot compete with their online competition. With the ease and cost effectiveness of online shopping, and not having the expense (and headaches) of operating large stores, online retailers have a competitive advantage that is insurmountable."
Since the offer was made on August 6th, Best Buy stock has plunged after an initial jump: The speculators are gone, all that is left now are the investors. The market is stating, quite clearly, that it does not believe that Mr. Schulze can arrange the estimated $10 billion in financing needed for the transaction. It is not even responding to the viability of Best Buy as an on-going entity, merely stating that it does not foresee the financing being arranged in what would be a lucrative deal for investment banks in a credit era of low interest rates for corporate transactions.
This should be an easy deal to finance as Best Buy is an operating business for which the founder and majority shareholder wants to acquire the remaining 80% of a (barely) profitable company so he can revitalize its operations. But Schulze has only made it much more difficult. It is likely he made the offer without the needed financing in hopes that the price would rise to the $24-$26 range. That would then make the financing much easier to entertain...oh well.
Not it will be much more challenging as the market is valuing Best Buy at well below that price target. According to Anthony Chukumba of BB&T Capital Markets, it is due to the low price of Schulze's offer, as "It is a different conversation if it is at least $30 a share and you have got your equity financing lined up and you have got your debt financing lined up. That is where shareholders might say 'You know what, let's just take the money and run."
If that were so, it would seem that Best Buy would be up as shareholders would not be selling and obviously be waiting for an offer of "at least $30 a share" rather than bailing out at under $20. Schulze has retained the investment bank Credit Suisse as his advisor and conferred with possible financing sources. At present, nothing in the way of funding has been secured. What has certainly been cemented into place is that the market does not see Best Buy worth even $20 a share, least of all in the $24 to $26 range, and most definitely not above $30.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Best Buy. Motley Fool newsletter services recommend Amazon.com and Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.