Best Buy Lets Schulze See Financials, Form Takeover Bid

A new agreement gives Richard Schulze access to Best Buy’s financials and 60 days to present a fully financed buyout offer. If rejected by the board, he can present a second proposal in January—and if rejected again, he can go directly to shareholders.

Best Buy Company, Inc., and Richard Schulze said Monday that they have reached a deal that grants Schulze access to the company’s non-public financial information in order to put together a formal buyout offer.

Schulze, the founder and former chairman of Richfield-based Best Buy, resigned from the company’s board in June. Earlier this month, he made a preliminary offer to buy the company for $24 to $26 a share. Schulze has since sought access to financial information he says is necessary to put together a formal offer.

Negotiations with the company broke down earlier this month, but talks resumed last week, shortly after Best Buy announced weaker-than-expected second-quarter financial results, including a 91 percent drop in profits.

The deal announced Monday grants Schulze permission to form an investment group with private equity firms in order to make a “fully financed proposal” to buy the company. Schulze has indicated that he plans to fund a buyout through a combination of investments from private equity firms, about $1 billion of his own equity, and debt financing.

Once Schulze accesses Best Buy’s financials, he will have 60 days to present a buyout offer, although that window “may be extended in certain circumstances,” under the terms of the agreement.

If the board rejects Schulze’s proposal, he can submit an amended offer in January, and the board would have 30 days to review the second bid. If denied again, Schulze could bring his offer directly to shareholders.

In the event that shareholders also reject Schulze’s proposal, he must refrain from further pursuing a deal until August 26, 2013—one year from when the agreement was reached.

Meanwhile, Best Buy said that it has agreed to give Schulze two board seats, as long as he does not violate the terms of the agreement announced Monday. A spokesperson for Schulze declined to reveal when Schulze intends to take advantage of that offer.

According to Best Buy, the deal “establishes a non-exclusive, orderly process, which satisfies the requests made by Mr. Schulze, while at the same time protecting the interests of all shareholders.”

Schulze, meanwhile, is “pleased that an agreement was reached,” according to the Monday announcement.

The complete agreement, which Schulze filed with the U.S. Securities and Exchange Commission, can be accessed here.

News of the deal sent shares of Best Buy up 6.9 percent to $18.50 in pre-market trading. They slid to $18.07 early Monday afternoon but remained up 4.4 percent from Friday’s closing price.

Analysts said the agreement marks an important step for Schulze, although an actual deal may still be a ways off.

Colin McGranahan, an analyst with research firm Sanford C. Bernstein, said in a statement that chances are slim that Best Buy’s board would accept the previously proposed offer of $24 to $26 per share. But he now expects Schulze to bring “higher and more credible offers to the table.”

“Still, the path to an actual deal remains complicated and still relatively implausible in our view, given the need to secure equity partners, the board’s likely view of inherent value, and the increasing difficulty financing higher offers,” McGranahan said, adding that a proposal from Schulze that the board would accept is “still a long ways away.”

Meanwhile, the agreement announced Monday gives the board and newly appointed CEO Hubert Joly some “breathing room” to bring forward their own restructuring plan, McGranahan said.

According to a report by the Associated Press, Wedbush Securities analyst Michael Pachter said that Schulze had a “zero probability of raising equity without due diligence, and now that zero is up to a 15 or 20 percent chance.”

“Private equity firms want to understand their investment and return, and in order to understand that you have to be able to look at the books,” Pachter added.