Wall Street shrugs at Schulze

  • Article by: SUSAN FEYDER
  • Star Tribune
  • June 7, 2012 - 8:50 PM

Wall Street appears to be focusing more on the business challenges facing Best Buy Co. Inc., rather than its founder's plans to leave and dispose of his stock.

Shares of the Richfield-based consumer electronics retailer fell about 9 percent in early trading Thursday after news broke that Chairman Richard Schulze would sever his ties with the company and "explore options" for his 20 percent stake. Best Buy's stock eventually recovered and peaked at $20.32 before settling at $19.70, down just 19 cents for the day.

The early decline suggested investors were concerned Schulze, Best Buy's largest stockholder, could start selling large blocks of stock on the open market, JPMorgan analyst Christopher Horvers said in a research note.

"We believe that this is the wrong interpretation," Horvers said.

Ben Marks, president of Minnetonka-based Marks Group Wealth Management, said Schulze will be looking for an exit strategy that is less disruptive to Best Buy's share price. "It was sort of the knee-jerk reaction," Marks said of the early drop in Best Buy's share price.

Faced with weak sales growth, Best Buy's stock price has been trending downward from the mid-40s for the past two years and hasn't traded in the 30s for several months. The company announced earlier this year that it seeks to save $800 million over three years by shutting down stores and laying off thousands of employees. Company officials said they will rechannel cost savings into investments in smaller-format Best Buy Mobile stores and experimental "Connected Stores" that resemble Apple stores.

After Schulze's announcement Thursday, speculation began building that he would try to pursue a leveraged buyout to take the company private. Some market observers believe shareholders would be looking for at least $30 a share. For now, Wall Street appears to be disregarding that possibility, refusing to bid up the share price close to $30.

William Frels, CEO of Mairs and Power, said the buyout talk is "hedge fund-type gossip."

"It's not a realistic outcome at this point," said Frels, whose St. Paul firm has never invested in Best Buy.

Even if Schulze were to find a private equity partner, it's unlikely Best Buy shares would fetch a significant premium over their recent market price, analysts said, especially as it struggles to find an Internet-era business model.

"You can't fix that overnight," Marks said. "The business is still challenged going forward and a new CEO will be facing a huge headwind."

Susan Feyder • 612-673-1723

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