Best Buy likely to stay put on Carphone Warehouse joint venture

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  • February 19, 2013 - 12:22 PM




For someone who has worked both sides of the Atlantic, Best Buy CEO Hubert Joly seems quite skeptical about exporting the company to the rest of the world.

“Retail is not the most global of businesses by any stretch of the imagination,” Joly told investors in New York last fall. “China [for example] is not a goal unto itself. If we can’t find a way to make business successful, then we shouldn’t be in China.”

True to his word, Best Buy last month said it will close 15 stores in Canada, including seven branded big boxes and eight Future Shop locations, its local banner. The move follows another bad month for Best Buy International: same-store sales fell 6.4 percent in December compared a decline of 3.1 percent during the same month in 2011.

International’s struggles has fueled speculation that Best Buy will soon end its European joint venture with British phone giant Carphone Warehouse (CPW) in Best Buy Europe, which includes Geek Squad and 2,393 smaller format Carphone Warehouse and the Phone House stores. The continent, in particular, has been a particularly tough market for Best Buy as the economic turmoil has weighed heavily on consumers. Best Buy has already closed its branded big box stores in the United Kingdom and Turkey.

But Joly does not seem to be in a hurry to end the 50/50 joint venture—and for good reason. Beginning in 2015, Best Buy can buy out CPW’s 50 percent stake for a price 10 percent less than the joint venture’s fair market value, according to SEC documents. If Best Buy declines the option, CPW can purchase Best Buy’s stake under the same terms.

That gives Joly about two years to decide the fate of Best Buy Europe. By that time, Europe’s economy may have recovered to the point where the company may want to keep the business.

Best Buy Europe already shows signs of improvement. For the 13 weeks ended Dec. 29, revenue grew 7.8 percent on a constant currency basis to $1.7 billion.



But like with most things with Best Buy these days, things are not that simple. According to British news reports, should founder Richard Schulze succeed in acquiring Best Buy, CPW can purchase Best Buy’s 50 percent stake at a price 10 percent lower than fair market value, which some analysts estimate at $838 million. Since Best Buy spent $2.1 billion to acquire that stake, that means the retailer would absorb a significant loss.

The so-called change in control clause gives CPW the right to exercise its option “if any party acquires a Controlling Interest in Best Buy (save for Richard Schulze, either alone or with Brian Dunn and any of their connected persons and in each case through a genuine and good faith structure through which he or they hold a Controlling Interest themselves).”

In order words, it seems the agreement specifically excludes a Schulze buyout as an event that could trigger a CPW buyout. But it depends on  how you interpret “connected persons” since Schulze has enlisted a trio of outside private equity firms to finance the bid.

Of course, nothing precludes Best Buy and CPW just rewriting their agreement. Best Buy, after all, paid CPW a hefty $1.2 billion fee to end their alliance on Best Buy Mobile. Best Buy could presumably just pay CPW another fee to significantly alter or perhaps scrap the joint venture.

But then again, Best Buy does not currently have the financial firepower to do anything that drastic. The company recently lowered its free cash estimate for fiscal 2013 to $500 million from an earlier estimate of $850 million to $1 billion. Best Buy appears to be investing that cash on matching competitors’ prices in the United States and remodeling stores.

So perhaps Joly’s best move on the joint venture is to continue his current strategy: sit back and see how things play out.

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