Best Buy Stock Climbs on $775M Deal to Exit Europe

Best Buy Stock Climbs on $775M Deal to Exit Europe

The electronics retailer is selling its stake in a European joint venture for roughly half of what it initially invested in the business; but analysts expected the divestiture, and investors responded positively.

Best Buy Company, Inc., said Tuesday that it has struck a deal to divest its 50 percent stake in a European joint venture for roughly $775 million—paving the way for the Richfield-based retailer to pull out of Europe altogether.

Investors responded positively to the news, and an analyst said the move will allow the company’s leadership to focus on turning around its domestic operations.

Best Buy said it has entered a definitive agreement to sell its stake in Best Buy Europe to Carphone Warehouse Group (CPW)—its London-based partner in the joint venture, which the companies launched in 2008—in a cash and stock deal.

The boards of both companies approved the deal, which is subject to approval by CPW shareholders and is expected to close by the end of June, Best Buy said.

The deal includes roughly $651 million in cash and $124 million in CPW stock; Best Buy, however, will pay CPW $45 million to end the companies’ Global Connect partnership, through which they advised retailers on how to increase performance of their mobile products businesses. Best Buy said that it expects to record a $200 million asset impairment charge in the first quarter of this year as a result of the European divestiture.

“After reviewing the business and spending time with our partners, we concluded that the timing and economics were right to enter into this agreement with CPW,” Best Buy President and CEO Hubert Joly said in a statement.

The deal will allow Best Buy to simplify its business, improve its return on invested capital, and strengthen its balance sheet, Joly said.

The divestiture is “not a surprise to me,” as “the European business is not a core business for Best Buy,” Anthony Chukumba, an analyst at BB&T Capital Markets who closely follows Best Buy, told Twin Cities Business in a Tuesday phone interview. The move allows Best Buy’s management to focus on turning around its core domestic business, and it reduces the company’s exposure to economic uncertainty in Europe, he added.

Best Buy is selling its stake in the European joint venture for less than half of the $2.1 billion that it initially invested in the business in 2008. But “hindsight’s 20/20,” and Best Buy, which may believe now that it shouldn’t have entered the joint venture in the first place, “got what they could get” from CPW, said Chukumba, who added that he is not bothered by the sale price.

In recent years, Best Buy has shuttered big-box stores in Europe while shifting focus to smaller-format stores. At the end of its most recent fiscal year, which concluded in February, Best Buy’s European operations comprised about 2,400 stores under the Carphone Warehouse and The Phone House banners.

Best Buy said that, prior to entering the deal to divest its European operations, the joint venture was expected to generate about $5.5 billion to $5.6 billion in revenue for the current fiscal year. Adjusted earnings, meanwhile, were expected to be “immaterial,” Best Buy said.

The sale of its European operations comes a couple of years after Best Buy bought out CPW’s contractual interest in Best Buy’s U.S. mobile phone business for about $1.3 billion.

Shares of Best Buy’s stock were trading up more than 10 percent at $26.69 late Tuesday morning. After plummeting about 50 percent in 2012 to close the year at $11.85 per share, Best Buy’s stock has rallied this year.

Meanwhile, Best Buy’s decision to exit Europe was an isolated decision, rather than part of a larger exit strategy from other international markets, according to Joly. (Best Buy also operates in Canada, China, and Mexico.)

“Each international market is different and the sale of our European operations should not suggest any similar action in our other international businesses,” Joly said.

Amid Best Buy’s turnaround efforts, however, there has been speculation that the company would divest both its European joint venture and its Five Star brand in China; Nicholas Wang, the CEO of Best Buy’s Five Star electronics chain in China, reportedly left the company last month.

The decision to exit Europe marks the first major move by Best Buy under its new board leadership. The company recently appointed founder Richard Schulze chairman emeritus after his drawn-out takeover attempt fizzled. Two former Best Buy leaders, Brad Anderson and Al Lenzmeier, were named directors, and most recently, Best Buy announced that Russell Fradin, president and CEO of software company SunGard, was appointed to its board.

Best Buy is Minnesota’s third-largest public company based on revenue, which totaled $45.1 billion in its most recent fiscal year. In its annual proxy filing, which was released last week, the company acknowledged having made a number of mistakes during what its chairman described as a tumultuous year. The company also outlined changes to its executive compensation strategy.