A deeper look at a Best Buy private takeover

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  • June 27, 2012 - 1:12 PM

The high stakes drama pitting founder Richard Schulze against Best Buy Co. Inc. seems to be approaching a pivotal stage.

The Richfield-based consumer electronics giant is searching for an investment bank to advise it in case Schulze attempts to take Best Buy private, according to Dealreport. The website identified Goldman Sachs as a candidate. Susan Willetts, a managing director at Goldman, had previously advised Best Buy’s joint venture with Carphone Warehouse.

As for Schulze, the ex-chairman and Best Buy’s largest investor is close to presenting a buyout offer to the board of directors, possibly as early as this week, according to a source close to the situation. The source, though, cautioned things remain up in the air.

None of this should surprise Best Buy. Last week, after the annual shareholders meeting, the board approved a change to its bylaws that requires an investor to hold at least 25 percent of the stock to call a special shareholders meeting to discuss such a buyout. Schulze owns about 21 percent of the company.

Experts call the move a classic takeover defense, designed specifically to impede Schulze. Impede, yes. Stop, no, for Schulze can easily arrange an informal gathering of sorts with top shareholders to hear his pitch. One analyst with a large institutional investor told Point of Sale he would very much welcome such a meeting.

However, Schulze might need all of the support he can muster. After Schulze, the next nine largest investors hold only about 31 percent of the stock, barely enough to get him past 50 percent. A special shareholders meeting could allow Schultz to address smaller shareholders and directly challenge the board.

Best Buy also has one more poison pill of sorts. The company has borrowed $1.5 billion through three bond offerings with maturity dates in 2013, 2016, and 2021. In the event that an acquirer controls more than 50 percent of the stock and the country’s three major credit rating agencies downgrade Best Buy debt to junk status, bondholders can redeem the notes at a 1 percent premium. (Fitch and S&P both rate Best Buy at BBB-, one level above junk; Moody’s rates the company at Baa2, two levels above junk.)

In short, Schulze and his allies could have to immediately pay back bondholders the $1.5 billion the company originally borrowed plus a $15 million premium and interest owed.

That certainly makes a buyout deal more expensive but it’s by no means a back breaker, especially when we’re talking about billions of dollars in play.

Schulze’s greatest obstacle to a deal is not any takeover defense the company can muster but rather money. Analysts think $30 a share will get the job done but he will more likely offer somewhere between $25 and $30.

Even at $30, Best Buy will likely reject the offer, arguing, as most companies often do, that Schulze is undervaluing the business. Yet the analyst with the major institutional investor would gladly take $30 a share, even though he thinks the company’s stock could eventually rise to $45 a share.

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