Major hedge fund dumps Best Buy

  • Article by: THOMAS LEE , Star Tribune
  • Updated: July 24, 2012 - 9:47 PM

David Einhorn's Greenlight Capital took a big loss. Analysts speculate that the fund's exit could help founder Richard Schulze.

David Einhorn

Hedge fund manager extraordinaire David Einhorn bet big on Best Buy stock. Then he lost big on Best Buy stock.

In a letter to investors Monday, Einhorn's Greenlight Capital said it sold off its 2.27 percent stake, or 7.7 million shares, in the Richfield-based consumer electronics giant. Greenlight didn't disclose its exact loss, but a Star Tribune analysis of Greenlight's stock purchases indicate the firm's losses could approach $100 million.

Among the reasons Greenlight decided to liquidate its Best Buy position: the recent departures of former CEO Brian Dunn and chairman/founder Richard Schulze. In April, Dunn suddenly resigned amid allegations he had an affair with a female employee. A subsequent board-led investigation concluded Dunn's actions were inappropriate and that Schulze knew of Dunn's behavior but failed to inform other directors. Schulze ultimately resigned.

"As a result, the company has an interim CEO and is trying to come up with a strategy," the letter said. "We worried that this could lead to additional business disruption so we exited with a loss."

Greenlight declined to comment further. Best Buy stock fell 58 cents, or 3.1 percent, to close Tuesday at $18.10.

In an e-mailed statement, a Best Buy spokesman declined to comment specifically on Einhorn.

"However, we're proud of our diverse shareholder base and are working hard to prove to them and others that Best Buy remains a great investment," said Matt Furman, Best Buy's senior vice president of communications and public policy, in the statement.

What remains unclear is how Greenlight's exit affects Schulze's plans to reclaim control of Best Buy. In June, Schulze said that he was exploring options for his 20 percent stake in the company, including an effort to take Best Buy private or replace the board of directors, according to sources with direct knowledge of the situation.

In some ways, Einhorn's move may help Schulze, analysts say.

Einhorn's exit could give Schulze more ammo to convince investors that he, not the current board and management team, is best suited to rescue Best Buy, industry observers say.

That Einhorn, considered by many as "smart money," would dump his shares at a significant loss just weeks before Best Buy releases its growth plan is "not a vote of confidence," said Jeremy Brunelli, a longtime Wall Street analyst who has followed Best Buy closely..

Best Buy has been struggling to grow sales as more consumers flock to the Internet to purchase personal computers and flat screen televisions. Interim CEO G. "Mike" Mikan, who has been campaigning for the permanent job, said the company will release a long-term growth plan by the end of the summer.

"Maybe [Greenlight] didn't think the plan is going to be good enough," Brunelli said. "Maybe [the firm] thought Best Buy could not get it done."

Worth over a $1 billion, Einhorn is perhaps best known for shorting the stock of Lehman Brothers in 2007, which ended up declaring bankruptcy and helped trigger the global financial crisis. He first acquired 6 million shares of Best Buy stock in the first quarter of 2011 and added another 1.7 million shares that year, making Greenlight the eighth-largest investor in the company.

At the same time, Einhorn's departure could also mean he does not believe Schulze will make a serious offer to buy the company, Brunelli said. If Einhorn did, it's logical to assume he would've waited to see that offer before selling his stake at a big loss, Brunelli said.

Thomas Lee • 612-673-4113

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