Best Buy's stock plunge fuels more buyout talk

After Best Buy CEO Hubert Joly presented to investors last week in New York, the scuttlebutt around Wall Street was that the company would be open to a $20-a-share buyout offer from founder Richard Schulze, even though many large investors had said Best Buy is worth at least $30 a share.

At this point, $20 a share is starting to look mighty good.

Best Buy stock plummeted 13 percent on Tuesday after the Richfield-based consumer electronics retailer reported weaker than expected third-quarter operating profits because of falling sales and higher costs. As a result, Best Buy shares fell $1.79 to close at $11.96, its lowest point since 2000, when Schulze was CEO.

"Best Buy's financial performance during the quarter was clearly unsatisfactory," Joly said during a conference call. "The results we're reporting today only strengthens our sense of urgency and purpose."

Best Buy's stock plunge comes as Joly prepares to meet Wednesday with Schulze and his buyout team, including former CEO Brad Anderson and former president Al Lenzmeier. Two sources confirmed to the Star Tribune that Schulze's private-equity partners consist of Texas Pacific Group (TPG), Leonard Greene and Cerberus, with TPG expected to be the lead financier.

All that remains, sources say, is for the buyout group to settle on a price. Schulze, the largest investor in Best Buy, had previously indicated that his team would pay $24 to $26 a share. But Best Buy's declining share price has prompted Schulze to delay his bid until early to mid-December to see whether the company's holiday sales performance further depresses its market value and thus makes Best Buy less expensive to buy, according to a source close to Schulze.

"With current trends deteriorating, we believe potential buyers are likely to wait as long as possible to take advantage of a lower stock price," Peter Keith, an analyst with Piper Jaffray, wrote in a research note.

Some analysts think Best Buy's situation will spook Schulze's buyout partners. The company said it now expects to generate $850 million to $1.05 billion in free cash flow for fiscal 2013, about 30 percent lower than its original forecast of $1.25 billion to $1.5 billion.

But institutional investors told the Star Tribune that Schulze's private-equity partners most likely expected those numbers. Indeed, the buyout team had already anticipated even worse free cash flow estimates, the source close to Schulze said.

What matters most to Schulze's buyout team, investors said, is when the company can stabilize its performance.

Excluding restructuring costs, Best Buy for the three months ended Nov. 3 earned $10 million, or 3 cents a share -- less than analysts' expectations -- compared with $173 million, or 47 cents a share, during the same period a year ago. Sales at stores open for at least a year, a key measure of retail growth, declined 4.3 percent.

While Best Buy warned Wall Street last month that its third-quarter numbers would be bad, the results "were even worse than we thought," said Mike Baker, an analyst with Deutsche Bank.

But Joly said the company will do better.

"We do not believe the rate of decline in the quarter can be extrapolated in any way," Joly said. "I know this will be a rough road. But we are confident we can enhance the performance of our current assets."

For one thing, Best Buy said, online sales jumped 10 percent in the quarter. The company also reported strong sales in smartphones, tablets, and e-readers.

Best Buy also expects a strong lift from new product launches, including the release of Windows 8. The retailer carries 45 Windows 8 products exclusive to Best Buy, including 28 touchscreen devices.

"It's something we feel good about going into the fourth quarter," said Mike Vitelli, the outgoing head of Best Buy's North American operations.

The company said they also invested heavily in retraining store employees, known as Blue Shirts, for the upcoming holiday season based on the model of its highly successful Best Buy Mobile format. The training, which is one reason for Best Buy's jump in expenses for the third quarter, will pay off in higher sales, Vitelli said.

During his investors presentation in New York, Joly said the company could generate more than $1 billion in extra operating income with some relatively basic fixes: devoting more store space to higher-selling products, reducing the number of product returns and turning more of the 1 billion annual visits to its website into sales.

But Joly declined to answer the top question on investors' minds: When will all of this happen?

Thomas Lee • 612-673-4113