Best Buy Agrees to Let Founder Schulze Conduct Due Diligence

Aug. 27 (Bloomberg) -- Best Buy Co., the world’s largest electronics retailer, and founder Richard Schulze reached an agreement allowing him to conduct due diligence in his effort to acquire the company a week after earlier talks failed.

Schulze can bring a fully financed, definitive proposal to the company within 60 days, and if that offer is rejected, he must wait until January to pursue an acquisition through other means, the Richfield, Minnesota-based company said today in a statement.

The agreement gives Schulze, 71, immediate access to financial data that may help him line up private-equity firms he needs to fund a takeover of the company he founded more than four decades ago and left in June. Talks between Schulze and Best Buy broke down on Aug. 19 and resumed two days later after the company posted quarterly earnings that trailed analysts’ estimates, a person familiar with the matter said last week.

“With access to company records, he can perform the due diligence that would be a condition of any potential private equity partner,” Michael Pachter, an analyst at Wedbush Securities in Los Angeles, said today in an e-mail. “He will have difficulty raising an additional $1 to $2 billion in equity from a partner, but without due diligence, his chances of raising that much in equity on blind faith were zero.”

Pachter rates Best Buy underperform, equivalent of a sell, and said Schulze has 20 percent to 30 percent odds of raising equity backing.

Best Buy rose 3.2 percent to $17.87 at the close in New York. The shares have declined 24 percent this year.

Offer Price

The stock is trading below Schulze’s Aug. 6 offer of as much as $26 per share, signaling “a high degree of skepticism in the market around the ability to reach a deal,” Colin McGranahan, an analyst for Sanford C. Bernstein & Co. in New York, wrote today in a note. He rates the shares market perform, equivalent of a hold.

The likelihood of the two sides reaching a deal “remains complicated and still relatively implausible,” said McGranahan, citing Schulze’s need to secure equity partners and the possibility that directors may deem whatever offer Schulze presents as too low.

The board also will offer Schulze, who holds about 20 percent of the shares, control of two board seats, Best Buy said. Schulze would lose those seats if he violates the standstill provisions of the agreement, the company said. Best Buy also agreed to waive a Minnesota takeover law that Schulze said was limiting his ability to line up private-equity investors and committed financing.

Amoeba Strategy

Reaching an agreement with Schulze may protect Best Buy from possible litigation claiming directors impeded an offer superior to a turnaround by newly hired Chief Executive Officer Hubert Joly, said Louis Meyer, a New York-based special- situations analyst for Oscar Gruss & Son Inc.

“If the company continues to have difficult sales and earnings trends in the next few quarters, it is like the board saying to Mr. Schulze, ‘Here are your two board seats; you’re in the same boat with us now,’” Meyer said by telephone. “It’s like an amoeba slowly surrounding an irritation with the goal of eventually neutralizing it.”

Schulze has offered to take Best Buy private for as much as $9.5 billion and said he would contribute at least $1 billion in equity to the deal.

Earlier Negotiations

Earlier in the negotiations, Best Buy had asked for a fully committed offer from Schulze within 60 days and stipulated that it remain in place for several months, people familiar with the matter have said. Schulze sought 90 days to obtain financing and didn’t want to incur millions of dollars in fees for keeping commitments together for an extended period, they said.

Schulze was willing to agree to a five-month lock-up with no restrictions on his ability to replace the board if it rejected his offer. Best Buy initially wanted an 18-month lock- up and later modified that to 12 months, before reducing that to four months with limits on Schulze’s ability to speak with Best Buy’s management or replacing the board, one of the people said.

The agreement, which was reached yesterday, allows Schulze to make a second offer to the board starting in January if the first proposal is rejected. The board would have 30 days to review the second bid before Schulze would have the opportunity to take it directly to shareholders at the company’s annual meeting or at a special meeting, Best Buy said.

Year Wait

If that offer fails, Schulze has agreed not to pursue an acquisition until the agreement expires in a year.

The sides’ law firms, Simpson Thacher & Bartlett LLP for Best Buy and Shearman & Sterling LLP for Schulze, were in talks before negotiations collapsed Aug. 19.

Along with the law firms, Goldman Sachs Group Inc. (GS) is negotiating for Best Buy and Credit Suisse Group AG (CSGN) for Schulze, said one of the people.

Best Buy on Aug. 20 named Joly as CEO to oversee a turnaround plan that entails shifting to smaller locations in a bid to fend off Amazon.com Inc. and Wal-Mart Stores Inc. (WMT) Joly, CEO of Carlson Cos., a Minneapolis-based operator of hotels, restaurants and a travel agency, will take over in September, replacing interim CEO Mike Mikan.

The next day, the company reported second-quarter profit that trailed analysts’ estimates and suspended providing an earnings forecast as sales of computers and televisions dropped.

Schulze has been recruiting executives and seeking the support of private-equity firms since resigning after the board found he failed to relay allegations that then-CEO Brian Dunn was having an inappropriate relationship with a female employee.

To contact the reporter on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net

To contact the editor responsible for this story: Kevin Orland at korland@bloomberg.net

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