The company’s momentum might upset founder Richard Schulze’s efforts to buy it.
Best Buy Co.’s stock price has surged 40 percent over the past two months, raising expectations that the electronics giant is gaining momentum and possibly complicating its founder’s efforts to buy it.
Since December, Best Buy has generated sales that have been stronger than anticipated as shoppers bought more flat-screen televisions and other major appliances. The performance has impressed investors and propelled the company’s share price from $12.20 on Dec. 12 to $17.33 when markets closed Tuesday.
For Richard Schulze, who founded the company in St. Paul more than 45 years ago, Best Buy’s recent improvement means he will likely have to pay significantly more than he would have expected late last year. The final price could be anywhere from $5 billion to $10 billion, analysts say.
Schulze began pursuing the company last summer, declaring that Best Buy’s leadership was ill-equipped to rescue it from sagging sales. But under the leadership of new CEO Hubert Joly, Best Buy has stabilized its business and won back the confidence of many investors and employees.
“This is the right management team for Best Buy, whether it goes private or stays public,” said David Strasser, an analyst with Janney Capital Management.
That doesn’t mean Schulze is going away. A source close to Schulze insists that the founder is working hard to acquire Best Buy. But now that the company no longer appears to be in crisis, Schulze and his team are weighing other ways to strengthen his sway over the company without buying it.
“There are all sorts of options at this point,” said the source, who requested anonymity because of the delicate nature of the discussions. “Buying the company is still on the table. Both sides [Best Buy and Schulze] are trying to make it happen.”
One option is to partner with an outside investor who would buy a sizable stake in Best Buy.
Together with Schulze, already Best Buy’s largest shareholder, the duo would wield considerable influence over the retailer. Under an earlier agreement with the company, Schulze’s 20 percent ownership of Best Buy stock entitles him to two seats on the 11-member board of directors. A minority investor would presumably get another seat, giving Schulze control over a third of the board.
“We believe this [move] also supports Best Buy shares,” Alan Rifkin, an analyst with Barclays, wrote in a recent research note. “It shows Mr. Schulze and his potential investment group’s confidence in the new management team.”
Best Buy generates over $50 billion in annual sales and employs more than 160,000 people.
Best Buy’s much improved situation today is almost a complete reversal of fortune from the same point last year. The retailer had struggled to increase sales as more consumers chose discounters like Wal-Mart and Internet retailers like Amazon.com. In April, then-CEO Brian Dunn resigned amid allegations that he used company resources to carry out an affair with a female employee.
A subsequent investigation concluded Schulze knew of the allegations but failed to inform the board. Schulze resigned as chairman and said he would leave the board the following year. In June, Schulze stepped down and launched his bid to acquire the company, with the help of former CEO Brad Anderson and Al Lenzmeier, a former vice chairman and chief operating officer.
But the turning point came in September when the company hired Joly, a former CEO of Carlson, as CEO. The move surprised Wall Street since analysts expected G. “Mike” Mikan, a board director and interim CEO, to get the job. Mikan, along with director Matthew Paull, led the boardroom coup that ousted Schulze. The prospect of Mikan leading Best Buy helped prompt Schulze to launch his buyout bid.
Mikan has since resigned from the board and Paull will retire in April.
Since taking the job, Joly has gone out of its way to court Schulze. He praised the founder to investors and media and met with Schulze, Anderson, and Lenzmeier the day before Thanksgiving to discuss strategy.