‘Bye-Bye’ to Best Buy?

8th August 2012

If the intended deal goes through, it could signal a new surge in companies leaving the public arena – similar to that in the UK around a decade ago when companies such as Debenhams, Halfords, and Boots went private. Although some have returned to public company listing, the debt-driven private equity purchases gave equity prices a lift.

And UK retailing groups, which face similar difficulties to the embattled Best Buy, will be closely following both the proposed buyout and whatever solution emerges (or fails to emerge) for the future of the US group.

The Detroit Free Press says Schulze is offering to take the electronics seller private only months after leaving as the company's chairman. Best Buy said "it would consider the offer but called it highly conditional."

Carphone Warehouse deal doomed

Best Buy is best known in the UK for its short-lived and loss making retailing joint venture deal with Carphone Warehouse. This started in 2008 with much hype about changing the face of retailing with higher standards of service but with scepticism from some other retailers who saw it as a slow motion car crash.

The gainsayers were right as it shut in November 2011 with losses of around £1bn on the Best Buy side. The US group had failed to understand the hold of the internet and select retailers such as John Lewis had on UK consumers. It could only work by blanketing the country's shopping centres – if only to spread the advertising spend. But on closure, there were just 11 thinly spread outlets compared with the 200 stores initially planned.

The company is holding up better in its homeland although its business model faces an equally uncertain future in the United States. But Schulze obviously believes that the future will be better away from public company scrutiny, analysts and three monthly reporting.

If successful, this could set a trend for other groups which have fallen out of stock market favour such as Yahoo. Private company status – probably via private equity or a buyout fund – would have shielded the stuttering online group from the recent embarrassments of its revolving boardroom door.

The Best Buy founder said that he wants to take the electronics retailer private by buying up all of its shares he doesn't already own. The $24 to $26 a share planned deal would value the company around up to $8.9 billion.

But while the revelation sent Best Buy equity sharply higher to $20 from recent $17.50 dollar lows, the price has subsequently slipped back, suggesting the market has severe doubts whether it could be finalised at the level Schulze suggests. There is no sign of a rival bidder to excite investors and, if they had faith in the achievability of $24 to $26, there would not be the current yawning gap.

Massive takeover premium

The Schulze bid, when first announced, represented a 36 to 47 per cent premium over the previous price. Schulze himself owns just over 20 per cent of the present equity so he would have to find around $6.9bn for the rest of the company. So any outside bidder would need to get Schulze onside.

He said a "deal needs to happen quickly. I am deeply concerned that further delay and indecision will cause additional loss of both value and talented leaders who are now uncertain of the company's future."

In his letter to Best Buy's board, Schulze claimed to have developed a plan to deal with the company's challenges and has talked with private equity firms.

Schulze said he would finance the deal through a combination of private equity investments, about $1 billion of his own equity and debt.

Best has to face up to the worst

Best Buy faces the same problems as UK electronics retailers such as Dixons Retail, the owner of Currys and PC World. These are led by "showrooming" where consumers look at goods in expensive retail locations and ask expensive staff for advice and then go away to buy online.

This has led the UK group into shrinking its retail estate – where it can exit leases without too much pain – and concentrate on higher margin electronics. But the higher the margin, the more scope online retailers have to undercut.

Besides leaving the UK, Best Buy announced a major restructuring in April including closing 50 stores, and cutting 400 head office jobs in an attempt to trim $800 million in costs. This was followed in early July, by the sacking of 600 in its Geek Squad technical support division and 1,800 other store workers.

That tabloid moment

Also in April, the then CEO Brian Dunn had unwelcome publicity which forced him to quit. It was alleged that that he violated company policy by having an inappropriate relationship with a female employee. The subsequent internal probe into the affair discovered that Schulze knew about the liaison but failed to alert either the board or the relevant human resources department. If Schulze is successful, then Dunn could return.

The big question for investors is whether the current board has a strategy beyond the slash and burn of the past months. And the equally big question for Schulze's private equity backers is whether he has a better vision for the future.


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