Schafer: Odds of a Schulze deal seem even surer

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: December 14, 2012 - 9:30 PM

No offer from Richard Schulze this week to acquire Best Buy Co. had a predictable impact on the company's share price, as it slipped Friday nearly 15 percent after surging the day before when a bid was imminent.

The irony is that the odds of Schulze successfully buying the company appear a lot better than they did a week ago.

By mutual agreement, Best Buy and Schulze moved the deadline for him to make a qualified offer from Sunday to the end of February. It was a common-sense move, as it made little sense for either side to assert the true value of the company when the busiest shopping season of the year isn't over.

It's also a common-sense move when you're actually trying to work out something with a potential buyer.

By its actions, Best Buy's board has shown that it is interested to see a solid proposal from Schulze, his very best shot. That's a far cry from the days when the company seemed to be, at best, willing to review a Schulze bid.

Best Buy Board members and executives have come miles in their attitude toward the company's founder since early August, when Schulze released a letter to the chairman outlining his interest in acquiring the company and complaining of no cooperation in his efforts to start due diligence.

Both sides eventually agreed to a process that gave Schulze 60 days to make an offer from the start of the due diligence period, with the potential for a 30-day extension so long as the company believed good-faith progress was being made.

That put Schulze's deadline right in the middle of December.

Everybody involved in negotiations back in August should have been aware of the seasonality of a retailer's business. But there it was, a mid-December deadline -- making it impossible to assess the company's full-year performance and, hence, its value. Last year's fourth quarter, for example, contributed about a third of annual sales and more than half of adjusted operating income.

While the Schulze team almost certainly has access to near real-time sales data and should have a good understanding right now of how the holiday season is going, a lot of inventory needs to move out of Best Buy stores in the next two weeks.

The question is not just what were the sales numbers for the remainder of the fiscal year, but what were the prices at which products are selling? In addition to the usual concerns about how many products get sold at clearance prices, Best Buy has said it will be more aggressive this season in matching lower prices offered by such competitors as Amazon.com.

By embracing an extension of the deadline to Feb. 28, Best Buy clearly wants Schulze and his potential partners to review how Best Buy finishes what has been one of its most challenging years.

The Schulze team, believed to include the private equity firms Cerberus Capital Management, Leonard Green & Partners and TPG Capital, was reportedly ready to deliver an offer by the end of the week before both sides agreed to an extension.

Best Buy's motivation to work with Schulze is not difficult to see, given how things have come apart this year. In March of this year, Best Buy's stock reached its 52-week high of $27.95 per share. More recently, Best Buy was telling its investors to expect adjusted earnings per share to actually increase this year.

Instead, the stock has slipped to $12.05 as adjusted earnings per share has collapsed, down 94 percent in the most recent quarter. That $24 to $26 per share bid Schulze floated in August seems to be a long way from the price he is likely to bid now.

Best Buy's board still has no reason to panic. Best Buy is a company with remarkable assets -- brand, physical presence, market share among them -- and it has recruited a leadership team that, by all accounts, is very capable.

But at this point, directors rightly concluded that they would rather see the best offer Schulze could make, one that they could even endorse to shareholders, than face the uncertainties of 2013 and beyond without it.

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

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