Best Buy Founder Schulze Makes Buyout Offer

Best Buy Founder Schulze Makes Buyout Offer

Richard Schulze offered $24 to $26 a share. The company described the offer as “highly conditional,” and one analyst said that the move seems “more like a negotiating tactic than a fully-funded and committed offer.”

Richard Schulze, the founder and former chairman of Best Buy Company, Inc., has, after much speculation, made a proposal to acquire the shares of the electronics retailer that he does not already own.

Schulze on Monday submitted a written proposal to Richfield-based Best Buy’s board—from which he resigned in June on the heels of a scandal involving ex-CEO Brian Dunn—seeking permission from the company's board to perform due diligence, and offering to purchase the outstanding shares for $24 to $26 per share in cash.

In a press release issued by a corporate and financial communications firm that is representing him, Schulze said that the offer price is “based on current public information and is subject to due diligence.” It represents a premium of between 36 and 47 percent to the Friday closing price of $17.64, and it reportedly values the company at roughly $8.5 billion.

Best Buy confirmed in a Monday statement that it received a letter “outlining an unsolicited, highly conditional indication of interest” from Schulze.

The company said that it “will review and consider the letter in due course, consistent with its fiduciary duties, in consultation with its financial advisors.” Its board “will evaluate this proposal carefully and will, as always, pursue the best course for its shareholders,” Best Buy said.

Schulze is seeking permission from the board to form a group to conduct due diligence and develop a more formal offer. Until such an offer is made, however, he plans to remain silent publicly about the growth plan he’s quietly sharing to entice investment banks, private equity firms, and former and current Best Buy executives to say they’ll join his effort, should he move forward.

Shares of Best Buy’s stock were trading up roughly 19 percent at $21.02 during Monday morning trading, on the heels of Schulze’s announcement.

Schulze, Best Buy’s largest shareholder, owns roughly 20.1 percent of Best Buy’s shares. Since his resignation, there have been reports that he is working with private equity firms as he explores a takeover, and he confirmed that fact in Monday’s announcement.

Based on discussions with those unnamed firms, Schulze said he plans to finance the proposed deal through “a combination of investments from the private equity firms, reinvestment of approximately $1 billion of his own equity, and debt financing.”

Schulze also stated that he has held discussions with former Best Buy executives—including former CEO Brad Anderson and former President and Chief Operating Officer Allen Lenzmeier—who have voiced interest in returning to the company if Schulze completes a successful takeover.

Schulze said that it is his “strong preference to pursue an acquisition cooperatively” with Best Buy’s board. He said that he has made several requests to the board to provide him the consent to form a group to discuss a definitive agreement; such consent is required under Minnesota law prior to Schulze striking formal deals with other potential partners.

Research firm Sanford C. Bernstein & Company, LLC, said in a Monday statement that Schulze has put together a “reasonably credible offer,” but the proposal is still a long way from a firm bid, given the lack of committed equity and debt financing.

“We see significant hurdles as yet for Schulze to proceed from here, from obtaining permission from the board to actually getting commitments from private equity firms and securing the necessary debt financing,” the firm said. “The public statement of an offer . . . looks to us more like a negotiating tactic than a fully-funded and committed offer.”

Despite the fact that Schulze hasn’t reached formal agreements with private equity firms or former executives, he is “confident, based on discussions held to date, that he can do so in short order,” according to the Monday press release.

“There is no question that now is the moment of truth for Best Buy and that immediate and substantial changes are needed for the company to return to its market-leading ways,” Schulze said. “After assessing all of my options, it is my strong belief that Best Buy’s best chance for renewed success is to implement with urgency the necessary changes as a private company.”

In a letter addressed to Hatim Tyabji, who succeeded Schulze as chairman, Schulze described his takeover offer as a “win-win,” saying it would provide existing shareholders with a significant all-cash premium, eliminate market and execution risk related to a turnaround under an interim CEO, and give the company “the time and flexibility to take the steps it needs to win back customers and reinvigorate Best Buy’s trusted brand and culture of valued employees working together to satisfy our customers.”

Best Buy, meanwhile, has recently taken steps to retain its current leaders and has announced major restructuring efforts as it attempts to turn the public company around. After a mass exodus of key executives, the company announced a plan to pay $2 million in cash, as well as stock awards valued at roughly $8 million, to four executives in a retention effort. The company has also announced mass layoffs and store closures as part of its turnaround strategy. (Click here to read more about the strategies recently outlined by interim CEO G. Mike Mikan at Best Buy’s annual meeting.)

Schulze spent 46 years at Best Buy and its predecessor company, Sound of Music, after founding the company in 1966. He served as CEO and chairman until 2002, and as chairman and a board director until June.

To read Schulze’s Monday press release, which contains the complete text of his letter to Tyabji and the rest of Best Buy’s board, click here.

Best Buy is Minnesota’s third-largest public company based on revenue. It has recently shuttered stores and laid off workers as it attempts to reinvent itself and to compete with online retailers like Amazon.com. In May, the company announced that its first-quarter earnings fell 25 percent, due in part to restructuring costs and a decline in same-store sales.