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An Aug. 14, 2001, file photo, of Richard Schulze.

Chuck Stoody, Associated Press

A private Best Buy: It's a long shot

  • Article by: THOMAS LEE
  • Star Tribune
  • June 8, 2012 - 9:17 PM

Best Buy Co. Inc. founder Richard Schulze certainly has the will to take the company private. But investors wonder if he can get the money to finance the deal, a difficult but not impossible mission.

Schulze threw Wall Street for a loop Thursday when he suddenly resigned as chairman and board director in order to "explore options" for his 20.1 percent stake in the Richfield-based consumer electronics retailer. One of those options is to assemble a group of private investors to take control of the company and install a new board and CEO, according to two sources close to the situation.

On the face of it, Schulze's plan seems audacious. For investors to bite, he and his allies would need to offer at least $9 billion, no small feat given the weak economy and Best Buy's struggles to grow sales and compete against online retailers like Amazon.

"I've talked to several private equity firms, and no one will touch it," said Colin McGranahan, a retail analyst with Sanford Bernstein & Co.

And while $9 billion is certainly a lot of money, it wouldn't be anywhere near the largest private buyout of a retailer in the United States. That distinction belongs to the $17 billion acquisition of supermarket chain Albertsons by Cerberus Capital Management, CVS and Eden Prairie-based Supervalu Inc. And while food retailing is a low-margin, low-growth business, Best Buy still generates plenty of profits and cash from consumer electronics and services.

Schulze also has the advantage of not starting from scratch. Thanks to his 20 percent stake, Schulze would just need private investors to contribute around $500 million to $1 billion and the rest he could borrow from the debt markets, according to an analyst with a major institutional investor in Best Buy. The individual requested anonymity because he was not authorized to speak to the news media.

"The deal can get done," even if Best Buy assumes billions of dollars in debt and generates weaker profits over the next five years, Jeremy Brunelli, a retail analyst with Consumer Edge Research in Stamford, Conn, wrote in a research report. That's because Brunelli feels any new owner of Best Buy could still squeeze a lot more cost out of the business beyond the three-year, $800 million restructuring plan the company announced earlier this year.

"We think net opportunities are still quite large," Brunelli wrote. "While there are clear hurdles, we don't think a [leveraged buyout] has a zero percent probability of happening."

In the end, the deal's fate largely rests with Schulze. For private investors to sign on, experts say Schulze must do two things that don't come naturally to him: cede control to outsiders and close down stores. Schulze had built Best Buy into the world's largest consumer electronics retailer by aggressively opening big box stores that overwhelm the competitors.

Operating a big box costs a lot of money, which is why Best Buy needs to generate enormous sales to preserve its profits. But as more consumers flock to the Internet, Best Buy's stores are becoming less profitable, which is why the company needs to significantly shrink the 1,100 stores it currently operates, analysts say.

The analyst who works for the institutional investor thinks Schulze might avoid private equity firms and partner with wealthy individuals or even other corporations. Schulze might even attempt to buy just part of Best Buy or purchase the entire business and sell pieces off to focus on the strongest parts.

"He can do more than a million things," said a person who knows Schulze well. "And goodness knows what he will do. But knowing Dick, he will take a lot of time to study them. He has a great deal of integrity and honesty. Whatever he does it will benefit the shareholders."

For now, investors anxiously await Schulze's next move, since Best Buy holds its annual shareholders meeting in less than two weeks. He has hired a top lawyer in New York and enlisted the services of Credit Suisse, an investment bank that specializes in leveraged buyouts, according to multiple sources.

Ultimately, Schulze's agitation is ultimately good for shareholders, analysts say. Either Schulze will succeed with a private buyout and offer investors a significant premium for their stock. Or he will fail and fade away.

"In the case of a complete exit of Dick Schulze, this would be a positive for the stock [in the long term] as it removes Schulze's influence completely, which has hampered progress in the past," Brunelli wrote."

Staff writer Dee DePass contributed to this report. Thomas Lee • 612-673-4113

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