Is the Company Going Private?

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

In July, Best Buy (NYSE: BBY) founder Richard Schulze floated a proposal to take the struggling Minneapolis-based company private. The proposal involved using a considerable amount of his own money as well as a sizable investment from a consortium of private equity investors to repurchase the bulk of the company's outstanding shares at around $25 per share. The total value of the deal would approach $6 billion. At Best Buy's current stock price of $12.26, a $25-per-share buyout would represent a 100 percent premium for current shareholders.

The proposed deal languished for several months until Schulze's December 13, 2012 announcement that he was actively raising capital to finance the bid. The company's stock rose by nearly 20 percent on the news. However, the euphoria was quashed the next day by a press release from Best Buy's board of directors. The release indicated that the deal was not imminent and set a February 28, 2013 deadline for Schulze to file a formal bid with the company. Best Buy's stock fell by nearly 15 percent on the news.

Although a formal bid has yet to be put together, it seems likely to involve simple cash payments to current Best Buy shareholders. Aside from Schulze, it is unclear whether any current or former members of Best Buy's management team would retain significant holdings in the company. Likewise, it is unclear whether any of the company's divisions would be spun off into publicly-traded entities.

The proposed deal would be conditioned upon approval by Best Buy's board of directors as well as a customary shareholder vote. While the company's board might prove reticent to accept a deal that many perceive as unfavorable, Schulze's willingness to pay a significant premium for the company suggests that shareholder approval is all but assured. If the bid is approved by both parties, it could close by the end of the first quarter of 2013. Further negotiations could push back its closing date into the second quarter of 2013 or beyond. The deal could also be delayed by infighting between Schulze and other interested investors.

Best Buy’s Business Today

Best Buy is a major electronics and software retailer with operations in North America, Europe and Southeast Asia. It sells televisions, recording equipment, cell phones, computers, mobile devices, and sound systems for cars and homes. Best Buy also contracts with major wireless providers to sell calling and data plans in its stores. In addition, it operates an e-store and a traveling device-repair service known as the "Geek Squad." It maintains nearly a dozen different retail divisions that typically concentrate in well-defined geographical areas, including Best Buy, Future Shop, Five Star, Carphone Warehouse and Magnolia Audio Video. 

In recent years, Best Buy has struggled to respond to changing technologies and consumer tastes. In 2011, it lost nearly $1 billion despite taking in about $51 billion in revenues. Although its acute financial problems began as consumer spending collapsed at the onset of the financial crisis, the root causes of Best Buy's malaise can be traced back even further. Its formerly-dominant position in the electronics-retailing industry has been eroded on two fronts.

The Competition

First, low-overhead online retailers like Amazon (NASDAQ: AMZN) are cheaper and more convenient than bricks-and-mortar retailers like Best Buy. Just as it once out-competed and eventually bankrupted smaller and less agile rivals like Circuit City, Best Buy now finds itself locked in a losing battle with stronger competitors. With lower labor, merchandise and overhead costs, Amazon is able to offer a wider range of products at lower retail prices. The problem is simple: Whereas Best Buy must staff and maintain hundreds of physical locations, Amazon cuts out the middleman by shipping products directly from its warehouses to consumers across the world. 

Discount retailers like Wal-Mart (NYSE: WMT) have also eaten into Best Buy's once-generous margins. As the largest North American retailer, Wal-Mart enjoys unrivaled pricing power. It maintains exclusive purchasing deals with many manufacturers and can rely on huge sales volumes to offset its minuscule margins. In addition, Wal-Mart and other general retailers enjoy greater product diversification than electronics-specific retailers like Best Buy. As its sales of high-margin but increasingly outmoded DVDs, video players and desktop computers have tailed off, Wal-Mart has compensated by finding new streams of revenue in unrelated departments. By contrast, Best Buy is exposed to the vagaries of a historically volatile retail sector.

At this point, it is too early to say with certainty whether founder Richard Schulze will succeed in taking Best Buy private. Given the company's grim outlook for 2013 and beyond, a deal that offers its shareholders a 100 percent return on their investment seems almost too good to be true. Current shareholders can only hope that a deal is reached by the February 28 deadline. Meanwhile, prospective investors should carefully consider the pros and cons of acting on this yet-to-be-finalized deal.

mthiessen has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of 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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