Given its recent problems, Best Buy Co. Inc. would seem like an ideal candidate for a private take over.
Over the past two years, its stock has lost more than half its value. The company generates around $2 billion in free cash flow a year and some analysts believe an investor could wring quite a bit of savings off its balance sheet: Best Buy operates 1,100 stores in North America alone and employs 180,000 employees.
But taking a troubled bricks and mortar retailer private is certainly no easy task. Just ask the people who own Toys R Us.
In 2006, private equity firms Bain Capital Partners and Kohlberg Kravis Roberts Co. led a leveraged $6.6 billion buyout of the famed toy retailer. Four years later, Toys R Us filed plans to raise $800 million through an initial public offering.
Today, six years later, Toys R Us has yet to go public and there’s no clear indication how Bain and KKR will successfully exit their big investment.
You can't blame investors for seeing parallels between Best Buy and Toys R Us. Both are store-centric retail chains known as "category killers" because they dominate consumer electronics and toys. And both have struggled to fend off aggressive competition from discount chains like Wal-Mart and Target and online retailers like Amazon.
But there are also big differences. For one thing, Toys R Us is heavily weighed down by debt. The company, which generated nearly $14 billion in sales last year, has some $4.8 billion in long term debt on its books. By contrast, Best Buy, which boasts over $50 billion in annual sales, has $1.7 billion in long term debt.
And there seems to be less obvious ways to grow revenue for Toys R Us versus Best Buy.
Toys R Us has expanded into consumables like diapers and formulas and larger-ticket items, including furniture, car seats and strollers. But Toys R Us is still primarily a chain that sells physical stuff.
Best Buy, on the other hand, uses Geek Squad to offer an increasing array of high-profit services to both consumers and small businesses. Plus, vendors like Verizon and AT&T pay Best Buy an awful lot of money to sell data plans to owners of smartphones and tablets.
However, Toys R Us has been re-energized by its new owners and management. Under CEO Gerry Storch, a former vice-chairman at Target, the company has been aggressively remodeling its stores and beefing up its online business.
In 2010, the company generated about $782 million in online sales, a 30 percent gain from the previous year, according to Internet Retailer. Toys ' R' Us now ranks 29th out of the top 500 Internet retailers, the publication said.
As a result, Toys R Us has made solid progress in growing sales and operating profits. Best Buy...not so much.
But for a private buyout to be successful, investors need to make money, either through an IPO or selling the company to another buyer. And right now, neither option looks attractive to investors.
Retailing is a tough business, especially for companies like Toys R Us and Best Buy that face constant pressure from the Internet. Both companies performed poorly in the key holiday shopping season and witnessed declining sales at stores open for at least a year.
At this point, it's not clear whether private investors will be willing to fork over big bucks for an aging consumer electronics chain, especially when there's no clear end in sight for those investors who forked over big bucks for an aging toy chain.