Back in June, I wrote an article that suggested Best Buy (NYSE:BBY) could see itself the target of a go-private bid from founder Richard Schulze, particularly after he stepped away from the company. Rumor and speculation became fact on Monday, though, as Richard Schulze formally launched a bid that values the company's outstanding shares at $24 to $26.

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Should Investors Expect a Rejection?
Companies, particularly troubled companies, often respond to bids like this with a virtually boilerplate rejection. While Best Buy investors should hope to hear that the company's board is seriously considering the offer, it won't be surprising if the company blasts it as "opportunistic," asserts that the deal undervalues the company, and/or that the uncertainty of the financing for the transaction makes it a bad deal for investors. On the other hand, maybe Best Buy management will see reason. The company badly needs strong leadership and a new direction, and presently has neither. Moreover, given the problems at fellow electronics retailer hhgregg (NYSE:HGG) and other retail turnarounds like J.C. Penney (NYSE:JCP) and Sears Holdings (Nasdaq:SHLD), I'm not convinced that Best Buy's board can find a talented executive willing to risk his or her reputation in trying to turn this company around.

SEE: Turnaround Stocks: U-Turn To High Returns

Is the Price Fair?
Arguably the biggest question for Best Buy shareholders is whether Schulze's proposal is a fair offer. The answer would appear to be "mostly." If you project that Best Buy will see a combination of low-to-no sales growth and ongoing margin pressure such that free cash flow never grows again (and, in fact, declines roughly 10% a year for the next decade), you can argue that the shares are still worth more than $27 a share. If Schulze can actually affect a turnaround at Best Buy that restores it to stability (let alone growth), it would seem that his offer substantially undervalues the company.

But here's the catch - it's increasing difficult for retailers to just muddle on for years at a time. Circuit City and Borders found that their situations went from "tough" to "untenable" at a surprisingly quick pace, and competitive pressure from Amazon (Nasdaq:AMZN) and Walmart (NYSE:WMT) aren't going to let up, even if Amazon starts collecting sales tax. Best Buy will find itself under increasing price pressure, not only from consumers but also from suppliers that are likely to start increasingly demand concessions from Best Buy to allow them to carry newly-launched products. In other words, there are still a lot of risks that Best Buy could fail altogether - and the longer the company stumbles around without a clear turnaround strategy, the greater the risk.

SEE: The 4 R's Of Investing In Retail

Can Schulze Get This Deal Done?
As of the time of this writing, there has been no formal response from Best Buy, so it's unclear whether the company will flat-out reject this deal, push for a higher price or give it due consideration as submitted. If the company seems hesitant, it could be due to the uncertainty of Schulze's proposal.

The formal press release and letter from Schulze was notable in its lack of specificity. Not only did he suggest a range of potential prices for the shares, but it was clear that he does not currently have the financial wherewithal to do the deal he envisions. While his confidence regarding his ability to secure private equity participation and/or debt financing may indeed be well-placed, it's not a done deal yet and that represents a meaningful risk factor for the deal. Private equity groups do indeed have a lot of cash to invest and interest rates are low, but there is a meaningful gap between knowing that the resources to do the deal are out there and getting all of the parties to sign on the dotted line on reasonable terms.

SEE: Biggest Merger And Acquisition Disasters

The Bottom Line
I have been cautiously positive on Best Buy for a while now, believing that a stock that still seemed cheap on the basis of a decade of double-digit free cash flow erosion could be ripe for a rebound. That said, my generally cautious outlook on retail and the lack of any real turnaround plan at Best Buy kept me from committing my own money to that belief.

With Best Buy now apparently officially in play, the easy money is going to fly off the table early in Monday's trading. That said, the uncertainties of the offer lead me to believe that the stock won't fully appreciate to the full bid value, and there could be some worthwhile appreciation potential left even with this stock in play.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.



Tickers in this Article: BBY, AMZN, HGG, JCP

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