Schafer: If Schulze wants his old company, let him have it

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: August 6, 2012 - 9:47 PM

Trading for Best Buy Co. stock opened at $21.60 on Monday morning after founder Richard Schulze released his plan to purchase the company at $24 to $26 per share.

Buying at $21.60 turned out to be a bad trade. By midmorning, shares were trading under $20 (still above Friday's close of $17.64).

Skeptics could argue that Schulze didn't exactly say he had the money to fund his proposed buyout, instead offering assurances that his financial adviser, Credit Suisse, was "highly confident" of securing the necessary loans. Schulze said he could "in short order" firm up commitments from equity investors, adding that he would provide a good portion of the equity himself.

It's hard to imagine a businessman of Schulze's stature signing a letter like that without near-certainty that he could perform. So the better question is whether the market anticipates a more attractive proposal than $26 per share, the top end of what Schulze proposed. At a last trade of $19.99, the answer is no.

So the board of directors at Best Buy should take Schulze up on his offer.

Of course, the board can't immediately agree to a deal without much more work. But today is a good day to begin moving toward a purchase agreement.

Schulze complained that his team hasn't received access to non-public information to complete his due diligence. Best Buy could sign a confidentiality agreement with Schulze and open the flow of information. This doesn't mean that Schulze should be allowed to run freely around his former headquarters, but the sooner Best Buy allows diligence to proceed the sooner the board can judge whether Schulze's financing is solid.

From there, the board's task is really pretty simple -- members have a duty to see that the cash proceeds to shareholders are maximized. In addition to picking the highest value, like any fifth-grade math student, the board will need to show its work.

Best Buy's advisers, including Goldman, Sachs & Co., will have to weigh Schulze's proposal with the most likely competing alternative. As of now, that alternative is a comprehensive strategy being put together by an interim CEO whose retailing experience is still best measured in weeks.

While some analysts have been positive about what they have seen of interim CEO Mike Mikan's plan, an investor doesn't really need to know all the details to know that there will be plenty of risk in his strategy.

So what is worth more today? Schulze's $26 in cash has the present value of, well, $26. How will Best Buy's advisers value Mikan's plan? It won't be like a stable business with low risk. Given recent trends of declining same-store sales and falling cash flow, the risk level likely falls at the other end of the spectrum.

In the end, it matters not one bit to Best Buy's board and shareholders how much risk Schulze wants to take. The question is whether he can bring the capital to close the acquisition.

While Schulze's team is flipping through documents in due diligence, Best Buy's advisers can solicit other buyers to create at least the threat of additional bidders, which, in turn, could get Schulze to increase his bid. And if no better deal surfaces and Schulze clearly can back up his final offer, then Best Buy's directors should present the offer to shareholders for their approval.

After a nice celebratory dinner the day of closing, the directors can go home. The following morning, they won't have to worry whether Apple Inc. increases its effort to sell directly to Best Buy customers. Or fret about Amazon.com coming up with more ways to capitalize on the free showrooms that Best Buy provides Amazon's customers.

Those problems would belong to Dick Schulze.

lee.schafer@startribune.com • 612-673-4302

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