The fate of Best Buy, which has been wracked for months by turmoil at its topmost levels over scandal and strategy, boils down to one factor, analysts say: vision.
Who has a better plan to turn the embattled consumer electronics chain around — its founder, Richard Schulze, or the board that forced him out?
On Monday, Aug. 6, Schulze submitted a proposal to Best Buy’s board of directors to take the company private.
The price tag could be as high as $8.8 billion — and Schulze, who owns 20.1 percent of the company, pledged to put up $1 billion of his own equity into the venture.
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Schulze proposed to buy all the shares he does not already own for $24 to $26 a share, a premium of 36 percent to 47 percent to Best Buy’s closing stock price of $17.64 on Friday.
“There is no question that now is the moment of truth for Best Buy and that immediate and substantial changes are needed for the company to return to its market-leading ways,” he said in a statement.
Schulze, 71, said former Best Buy chief executive Brad Anderson and former chief operating officer and president Allen Lenzmeier are interested in rejoining the company as part of a buyout.
Best Buy called the unsolicited offer “highly conditional” and said it would evaluate it carefully.
A source close to the company who was not authorized to speak for the board said the proposal was not a formal offer because it lacked details on how it would be financed.
Retail watchers have anticipated this
move since Schulze’s abrupt resignation in mid-May, after a scandal involving previous CEO Brian Dunn over allegations of an inappropriate relationship with a female employee. Dunn resigned in April, but a company investigation concluded Schulze had failed to alert the board or human resources after receiving a report of Dunn’s misconduct.
Board member G. “Mike” Mikan, whose background is in finance, was named interim CEO in April and has spoken bluntly about the company’s shortcomings. He has followed through on a plan, outlined by Dunn, to close 50 big-box stores and focus more on services and smaller stores.
Most analysts agreed that neither side has spelled out how it plans to turn around a company whose sales are being hacked away by online giants, including Amazon.com, and by big-box rivals such as Target, Walmart and Costco.
Last year, Best Buy lost $1.23 billion despite a slight gain in revenue, to $50.71 billion.
Investors seemed to greet Schulze’s proposal with skepticism. Best Buy shares rose $2.35, or 13 percent, to close Monday at $19.99, far short of his proposed range. The company’s stock hit a recent low of $16.97 last month, down 26 percent for the year.
“You have to say it is the vision thing,” said Carol Spieckerman, CEO of NewMarketBuilders, a retail analysis firm in Bentonville, Ark.
“If he were to share even a vision outline or statement, it would help to rally the troops.”
On the other hand, the current management could seize the initiative if it offered its own path to daylight, she said.
“I don’t know if they’ve clearly articulated a vision — it’s more cost-cutting rather than a truly well-articulated visionary plan,” she said.
Whatever you call it, Schulze’s proposal would appear to differ from the board’s.
“As a former insider, he must have had some sense of where the board was going and didn’t agree with that,” said Jim McComb, head of the McComb Group, a Minneapolis real estate consultancy that specializes in retail.
Several observers said Schulze might have to sweeten his offer to get a positive response from the board.
Schulze said in his letter to the board that he has had conversations with “several premier private equity firms with deep experience in retail who are interested in a possible acquisition of Best Buy.” The firms were unnamed.
Credit Suisse, Schulze’s financial adviser, is “highly confident” that it can arrange the necessary debt financing as well, according to his statement.
RBC Capital Group said Monday that it believes the debt portion of the deal can get done.
The question is whether Schulze can raise anywhere from $800 million to $2.5 billion in private equity, it said.
“We think the lower end of this range is likely doable but may be much more difficult at the higher end of this range,” RBC analyst Scot Ciccarelli said.
RBC based its conclusion on its best guess at this point that the deal needs 30 percent to 50 percent equity financing, which includes Schulze’s 20 percent.
Ratings agencies Standard & Poors and Fitch both downgraded Best Buy’s credit rating to junk status, saying Schulze’s offer would add substantially to the retailer’s debt.
A St. Paul native, Schulze founded Best Buy in the 1960s as the Sound of Music, a humble St. Paul record shop, growing it over the decades into a retail powerhouse.
With the buyout offer, Schulze has formally declared war on the board, “and I think some of it reflects his stepping down after the Brian Dunn affair,” said Dave Brennan, co-director of the Institute for Retailing Excellence at the University of St. Thomas.
For either side, turning the company around presents daunting challenges, said Stephen Baker, an analyst at technology consultancy NPD.
“When you’re No. 1, and the ground is crumbling beneath your feet, it’s hard to run to where you’re more secure because you give up a lot,” he said.
Baker said Best Buy is making the right moves now, heading toward smaller stores instead of the big-box behemoths and emphasizing technology ecosystems that orbit brands such as Apple, Google and Microsoft instead of individual devices.
But the clock is ticking on making changes. Schulze complained in his letter that he repeatedly asked for due diligence information from the board so he could form his group of private investors, but the board told him it would take three weeks.
The more time it takes, the closer the company gets to the all-important holiday shopping season. Some analysts said that if it drags out, it could stall any momentum next year to enact changes, but other analysts said plans already are set for the shopping season and are unlikely to change.
Brennan said he expects the board will issue an answer by Labor Day — about three weeks from now.
“They don’t have to respond,” he added. “Then it would be a hostile takeover.”