Best Buy Co. (BBY) founder Richard Schulze, who stepped down as chairman in June, offered to take the electronics retailer private at $24 to $26 a share. The stock had the biggest gain in more than three years.
Credit Suisse Group AG, Schulze’s financial adviser, is confident it can obtain financing for an offer, according to a letter sent to the board today. The offer is at least 36 percent more than Best Buy’s closing price Aug. 3, and the midpoint of the range gives the company an equity value of $8.5 billion.
Schulze, who held more than 20 percent of Richfield, Minnesota-based Best Buy as of June, plans to contribute $1 billion in equity from that stake, the letter shows. The rest of the money will come from what the letter calls “premier private-equity firms with deep experience in retail who are interested in a possible acquisition of Best Buy” and debt financing. Standard & Poor’s and Fitch Ratings cut the company’s credit rating to junk on the prospect of additional borrowings.
“I have been actively exploring all available options for my ownership stake,” Schulze, 71, said in the letter. “That exploration has reinforced my belief that bold and extensive changes are needed for Best Buy to return to market leadership and has led me to the conclusion that the company’s best chance for renewed success will be to implement these changes under a different ownership structure.”
Best Buy confirmed in an e-mailed statement that it had received the letter from Schulze and said its board would consider it “in due course.” Through a spokesman, Schulze declined to comment on the letter.
Best Buy advanced 13 percent to $19.99 at the close in New York for the biggest gain since March 2009. The shares failed to rise to the offer price after analysts said a deal may be difficult to complete.
The possibility of higher debt prompted Standard & Poor’s to cut the retailer’s credit rating one level to BB+, the first level below investment grade, Jayne M. Ross, an analyst for S&P, said today in a statement. The rating remains on watch negative, which means it may be reduced further.
Fitch also cut the rating to BB+ with a negative watch, while Moody’s Investors Service reaffirmed its rating of Baa2, the second-lowest investment-grade rating, and moved the outlook to developing from stable.
The electronics chain had about $1.7 billion in long-term debt as of May 5, according to regulatory filings.
Schulze is seeking the board’s permission to conduct due diligence on the electronics retailer and form a group including private-equity funds and other executives that would make a more complete offer. Under Minnesota corporate law, Schulze needs permission from directors to form such a group. His offer will have no deadline as yet, and it’s subject to being able to conduct due diligence.
“With the board’s agreement that I may work together with potential private equity partners and former senior executives, and with timely access to relevant non-public company information, I am confident that the necessary due diligence could be completed expeditiously and a binding agreement to acquire Best Buy could be reached quickly,” Schulze said. “I am prepared to enter into a customary confidentiality agreement and begin work immediately.”
Schulze has negotiated unsuccessfully with the board for the past several weeks, seeking permission to conduct due diligence and form a bidding group, said a person familiar with the matter. Best Buy’s board told Schulze it wasn’t a good time to go private because it was looking for a new CEO, and asked for three more weeks to consider the matter, said this person.
No private-equity firms are named in the letter, yet Schulze has sought and received interest from funds that want to be part of his effort, said this person. He likely would have two buyout firms backing his offer, said this person.
Private-equity firms may need to invest $3.5 billion to $4 billion, according to Peter Keith, an analyst at Piper Jaffray Cos. in New York.
“While a deal may be able to get done at these levels, it gives us pause that no private equity firm was disclosed in the letter and no other known equity financing is secured at this point,” Keith wrote today in a note to clients. He rates Best Buy neutral, equivalent of a hold.
Schulze, who spent almost half a century with the company, resigned as chairman in June after an internal probe found he acted inappropriately in handling allegations about then-CEO Brian Dunn’s relationship with a female employee. Schulze said when he resigned that he would consider all options, including selling his stake.
Former Best Buy Chief Executive Officer Brad Anderson and former President and Chief Operating Officer Allen Lenzmeier have expressed interest in rejoining the company as part of a buyout, according to the letter. Other former executives, such as J.D. Wilson, who was senior vice president of enterprise capabilities, have spoken to Schulze about joining his effort.
“He is talking to people he trusts,” Wilson said in an interview in July. “There is a small group he’d like to have with him in righting the ship. He is serious as a heart attack.”
Wilson told Schulze, who called him in June, that he would be “raring to go” if he was able to buy out the company.
The retailer has few assets it could sell if business remains weak, according to Piper Jaffray’s Keith. He said Schulze’s style as a “hands on business manager” may pose a risk to private equity owners concerned about an “overly controlling business partner.”
Best Buy has struggled as customers migrate to Amazon.com Inc. (AMZN) and other online merchants. The retailer posted a net loss of $1.23 billion on revenue of $50.7 billion for the year that ended in March, its first annual loss since 1991, data compiled by Bloomberg show.
To trim costs, Best Buy is shutting 50 big-box locations in the U.S. this year while upgrading its website and accelerating the opening of stores to sell mobile phones.
While Schulze appears to have a plan to address some of the company’s strategic obstacles, the added debt needed to complete a buyout would “substantially” increase risks for Best Buy, said Colin McGranahan, an analyst at Sanford C. Bernstein & Co. in New York.
“The proposal is still a long way from a firm bid,” McGranahan wrote today in a note to clients.