Best Buy Stock Up 15%; Schulze’s Bid Likely Imminent

Best Buy Stock Up 15%; Schulze’s Bid Likely Imminent

Company founder Richard Schulze reportedly faces a Sunday deadline, and his offer is expected to be at least $5 billion to $6 billion.

Best Buy Company’s stock price shot up more than 15 percent Thursday morning on speculation that founder Richard Schulze’s buyout offer is imminent.

Citing unnamed sources, the Star Tribune reported that Schulze will make a fully funded finance offer for the Richfield-based consumer electronics giant by the end of the week, and possibly on Friday.

Schulze reportedly faces a Sunday deadline, and his offer is expected to be at least $5 billion to $6 billion.

Last weekend, Schulze and his team secured agreements to finance the deal from bankers and private equity investors—a group that includes Cerberus Capital Management LP, Leonard Green & Partner, and the Texas Pacific Group, the unnamed source told the Star Tribune.

Schulze, who now lives in Florida, is expected to meet with his top advisers—including former Best Buy CEO Brad Anderson and former President Al Lenzmeier—in Minnesota on Thursday and Friday.

Thursday’s news represents a departure

A Best Buy spokeswoman reached Thursday morning declined to confirm Schulze’s deadline or comment on matters relating to the possible buyout.

It’s unknown exactly how much Schulze will bid for Best Buy, although investors have recently predicted that it’s likely to be lower than the $24- to $26-per-share range that Schulze first outlined over the summer.

“I don’t think investors would expect that and would require that,” Anthony C. Chukumba, senior vice president and senior equity research analyst for the consumer group at Richmond, Virginia-based BB&T Capital Markets, told Twin Cities Business. (Chukumba closely follows Best Buy.)

Since late June, Best Buy’s stock price has slid 45 percent. It closed Wednesday at $12.20, but shares were trading up 15.4 percent at $14.06 Thursday morning on news that a buyout offer is expected within the next couple of days.

Schulze’s original buyout offer deadline was in mid-November, but he requested a 30-day extension to see how Best Buy would fare during the holidays, according to the Star Tribune.

Institutional investors and analysts have reportedly speculated that shareholders would be open to selling their stake to Schulze but would prefer at least $17 per share.

Schulze, who founded Best Buy in 1966 as a single stereo shop in St. Paul and long served as its chairman, resigned from the company’s board in June on the heels of a scandal involving ex-CEO Brian Dunn. Schulze made a preliminary buyout offer, which the company described as “highly conditional,” in August—and in late August, Best Buy and Schulze reached a deal that granted Schulze access to the company’s non-public financial information in order to put together a formal offer. The negotiating terms set at that time allow Schulze to make a second offer in January if the board rejects his initial bid.

Schulze and Best Buy’s new CEO Hubert Joly, who took the reins in September, were reportedly scheduled to meet in late November for a discussion about how to revive the struggling retailer.

Best Buy reported a net loss of $13 million, or 4 cents per share, from continuing operations for the quarter that ended November 3. That’s compared to net earnings of $173 million, or 47 cents per share, for the same period a year ago. Excluding restructuring charges, the company’s net loss totaled $10 million, or 3 cents per share—falling significantly short of the 12 cents that analysts polled by Thomson Reuters were expecting.

Additionally, Best Buy’s cash and cash equivalents have plummeted over the past year. While the sum of those two figures totaled roughly $2.1 billion as of October 29, 2011, it had shrunk to $309 million as of November 3. Total assets also declined from $12.9 billion to $11.8 billion over the period.

“The company’s really been struggling over the last few quarters and that’s been a draw on their cash,” Chukumba said, adding that the cash decline is likely being driven by the underperformance of the business and that the company has working capital in the form of extra inventory. That said, Best Buy has “more-than-adequate liquidity” and will generate positive free cash flow this year—but the cash and cash equivalents decline is becoming “a bit of a concern” for investors, he said.

Chukumba said that it’s too early to expect Joly’s turnaround plans to have taken hold, partly because he’s still building out a senior management team. (Among his recent hires is Sharon McCollam, who joined the company on Monday as its chief financial officer after serving in the same position at Williams-Sonoma.)

“The earliest that we would really start to see a positive impact from his turnaround plan is middle- to late-next fiscal year,” Chukumba said, adding that Joly is likely now focused on getting through the holiday season.

Best Buy is Minnesota’s third-largest public company based on revenue, which totaled $50.7 billion during the last fiscal year.