For BBY investors, crunch time

  • Article by: ADAM BELZ and WALKER MOSKOP , Star Tribune staff writers
  • Updated: August 6, 2012 - 9:48 PM

As Richard Schulze attempts a takeover, shareholders face a decision: To sell or not to sell?

Richard Schulze

Richard Schulze

Photo: Chuck Stoody, Associated Press

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They are a diverse group ranging from a delivery driver in Maplewood to institutional investors on Wall Street, and they could decide whether Best Buy's founder gets his company back. They are the shareholders whose last name is not Schulze.

No shareholder other than Richard Schulze -- who holds a 21.58 percent stake in Best Buy -- owns more than 7.11 percent of the company. The company's investors could decide whether $26 per share -- the upward range of the price proposed by Best Buy's founder and former chairman on Monday -- is a good offer.

The deal, if it comes to pass, will likely appeal more to institutional investors than to individual shareholders, said Chris Puto, dean of the Opus College of Business at the University of St. Thomas.

"If they don't sell to Dick, then they're betting on the current leadership and circumstance, and I'm not sure how strong a bet that is," said Puto. "I can't believe they're not going to opt in to selling."

The market appeared to agree with Puto on Monday, with Best Buy shares hovering at about $20 per share most of the day after an early spike.

But each investor sees things differently, and shareholders who fondly remember the mid 2000s, when BBY shares traded above $58, may be reluctant to sell for $24 to $26 per share. For individual investors, the original price of entry will dictate their view of Schulze's offer.

"It depends on what each one of them paid for it," Puto said. "The reference point varies by the individual."

Ed Lalor, of St. Cloud, is a labor and unemployment arbitrator who holds more than 3,000 shares in Best Buy and has been an investor in the company for a decade. He'd rather Schulze stay away, and he thinks $26 per share is too low.

"If someone else wants to come in, fine. I'd rather they just take the time and straighten out the problems because I think they're correctable," Lalor said.

Michael Freier, who's retired and lives in Bloomington, had held BBY stock for 14 years when he decided two weeks ago to unload the shares for $18 each. Long-term, it was a good deal for Freier. Best Buy stock hovered around $2 per share through the mid-1990s, when he bought in.

Had he known that Schulze would offer to buy the company, he said he would not have sold. But two weeks ago Freier reckoned the company's share price -- as low as $17.23 in late July -- was precarious.

"There was just too much risk involved," Freier said. "I thought I'd go out before the stock plummeted."

Institutional investors like Fidelity, Blackrock and Vanguard Group probably would side more with Freier, said Puto. If institutional investors cannot confidently predict that the company's stock price will reach Schulze's $26 per share offer in the next 18 to 24 months, then they will want to sell.

One hedge fund, Greenlight Capital, dumped its 7.7 million Best Buy shares in late July at a loss that probably approached $100 million, citing concerns about further losses.

The consensus Monday among analysts who follow Best Buy was that the stock will reach $22.68 in 12 months -- still below what Schulze said he plans to offer. Add in the uneven U.S. economic recovery and the potential for a market-moving election in November, and many investors would prefer the cash over the stake in a struggling big-box retailer that's lost a quarter of its value in the past five months.

Another consideration for institutional investors is the diversity of their portfolios. Most of them, said Puto, have invested in Best Buy because it fits into a certain retail category. Were they to sell to Schulze, they'd have to find other retailers to sink the money into.

One option for investors, said Puto, is Target. • 612-673-4405 • 612-673-4265

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Richard Schulze