Could Best Buy's Founder Take The Company Off The Market?

By Stephen D. Simpson, CFA | June 08, 2012 AAA

Electronics retailing giant Best Buy (NYSE:BBY) badly needs stability, and that seems to be exactly what the company is not getting. The company is still looking for a new full-time CEO, preferably one with experience in turning around a retailer, and now the company's founder is stepping away from the company. Now board chair and founder Richard Schulze has elected to step away from the company entirely, instead of staying on the board for another year as had been planned.

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A Lot of Stock in Play
While the company badly needs a turnaround plan, what it has now instead is a great deal of uncertainty as to Schulze's next step. Given that Schulze owns more than 20% of Best Buy's shares, what he plans to do with his stake is going to have a major impact on the near-term direction of the stock.

At first blush, it seems unlikely that he would want to simply hold his stake as a passive investor. Best Buy is clearly struggling, and there aren't too many people out there who would found a business, serve as its chairman for so many years, and then happily have a large chunk of his or her wealth basically out of their own control.

Selling a 20% stake into the open market when the stock is trading at just over 2 times trailing EBITDA sounds like a bad idea, and one that would only depress the price further. If Schulze wants out, a better option may be to either strike a deal with the company for a negotiated deal (almost certainly at a below-market price) or sell to an investor/institution that isn't afraid of turnaround situations.

Take It Private?
Instead of walking away, Schulze may instead be contemplating an even bigger step to regain total control of Best Buy. Pushing his stake above 50% would likely require more than $3 billion in cash, but Schulze has at least three factors in his favor - he's already nearly half-way there, interest rates are low, and private equity firms have cash on hand that they need to invest.

It's not as though there isn't a long tradition of private equity involvement in real estate. Dollar General (NYSE:DG) spent a spell as a private company before going public again, Michaels Stores has filed to go public again after being taken private in 2006, and warehouse club company BJ's was taken private just last year.

On the other hand, there are plenty of cautionary tales out there. Toys R Us went private back in 2006 and though the company's performance has improved, rumors of an IPO have yet to come to fruition. Likewise, while Sears Holdings (Nasdaq:SHLD) has not been taken private, the struggles of former "next Warren Buffett" Eddie Lampert may lead investors to think twice about taking on a struggling retailer.

SEE: Why Public Companies Go Private

Good and Bad News
One advantage for Best Buy is that the company has so little debt and a relatively valuable asset base. Moreover, there is a point of view out there that suggests turnarounds are easier to execute with private companies, as there isn't as much scrutiny nor a need to publicly discuss new strategies (and allow competitors to perhaps respond more quickly).

It's also worth noting that Best Buy isn't necessarily doomed. If companies like Toys R Us and Michaels can continue to exist in Amazon's (Nasdaq:AMZN) world, there's no reason that Best Buy cannot as well.

On the other hand, debt is what ultimately kills companies and saddling an already-struggling business with billions in debt is not going to help Best Buy. Likewise, just as Sears is struggling to find a distinctive and profitable merchandise line-up and Borders, Circuit City and Linens 'n Things clearly could not), there's no guarantee that Best Buy can find that right mix of products and services to remain not only viable but vibrant.

The Bottom Line
It doesn't seem ridiculous to think that Schulze stepped down in part because a private equity/LBO deal is in the cards. Were he to have proposed such a deal to the board, he would have had to recuse himself anyway. Moreover, he may well have found that his voice was no longer appreciated or wanted within Best Buy and decided it was time to push up his departure date.

Buying on the basis of hope for an M&A transaction is not a great strategy for winning investments. At a minimum, investors should at least make sure that they can live with holding the stock if the company stays independent and, absent a turnaround plan, I'm not sure many investors will feel that way about Best Buy. All of that said, these shares may yet hold appeal for investors who can handle the risk that goes with long-shot turnaround stories.

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

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