Are Best Buy and Supervalu Prime Takeover Targets?

Some analysts are speculating that the two Minnesota-based companies, whose share prices have dropped dramatically, could be the targets of leveraged buyouts.

Have Best Buy Company, Inc., and Supervalu, Inc.—two of Minnesota’s five-largest public companies—become buyout targets?

The stock prices of Richfield-based Best Buy and Eden Prairie-based Supervalu have fallen so much that some observers believe so.

Barclays stock analyst Meredith Adler wrote in a recent report that Supervalu has become a particularly cheap leveraged buyout target, according to reports by Bloomberg and the Star Tribune.

The Star Tribune reported that Supervalu’s stock is trading at lows not seen since the early 1980s. It fell to $4.05 earlier this week, though it closed up on Wednesday at $4.27. Its 52-week high is $9.71, and it was trading around $16 in May 2009. Adler’s report says that despite its sales woes and debt burden, Supervalu has “healthy” current liquidity.

In a separate report, a senior director of Fitch Ratings wrote: “Best Buy appears to be attractive from a [leveraged buyout] perspective,” according to the Star Tribune.

“Best Buy still generates meaningful profitability, and its free cash flow remains strong,” the analyst wrote. “Potential buyers could also consider major cost cutting and accelerating the downsizing of the company’s retail foot print versus current management plans.”

Best Buy has experienced significant management turnover recently—including the departure of CEO Brian Dunn amid a personal conduct investigation.

Founder Richard Schulze announced last week that he would immediately step down from Best Buy’s board and is exploring options for his 20.1 percent ownership stake in the company. One of those options is to take the company private under new management, two sources with knowledge of the situation told the Star Tribune.

Best Buy’s stock, meanwhile, is trading at just four or five times earnings, according to the Minneapolis newspaper.

But the complexity of both Best Buy and Supervalu would make a buyout challenging. Financing a leveraged buyout, which would rely heavily on debt, is of particular issue for Supervalu, the Star Tribune reported. For Best Buy, analysts say Schulze would need to offer at least $9 billion for shareholders to sign on; in addition, the company faces strong competition from Wal-Mart, Amazon, and others.

To learn more about the speculation surrounding Supervalu and Best Buy, read the full Star Tribune report here.