Customers wait in line overnight outside a Best Buy store in Fort Worth for… (Tom Pennington, Getty Images )
Two months after former Best Buy Co. Chairman Richard Schulze exited the board amid scandal, he offered to buy the struggling electronics giant for as much as $8.84 billion, a deal that would make it the largest buyout ever of a U.S. retailer.
But the offer of $24 to $26 a share was met with considerable skepticism Monday among analysts and investors, who nudged the stock price up $2.35, or 13.3%, to $19.99 but nowhere close to the proposed takeover offer price. Standard & Poor's cut Best Buy's credit rating to junk since such a buyout would add debt to its books.
Schulze said he would take the company private by putting in $1 billion of his own money and securing debt financing as well as investments from private equity firms. He made the offer in a letter sent to the board that he made public Monday
The proposed buyout — which could top the $8.4-billion buyout of Toys R Us in 2005 — represents a premium of 36% to 47% over Best Buy's closing stock price Friday.
The company has been struggling to stay relevant with shoppers who can comparison shop on their smartphones. It's also fighting nimble rivals such as Apple Inc. and online competitors such as Amazon.com Inc., which can frequently offer lower prices.
Best Buy announced plans in March to close 50 of its big-box stores, lay off 400 workers and downsize many of its other locations. In May the company reported a 26% drop in its fiscal first-quarter profit.
The company based near Minneapolis is the biggest survivor of the consumer electronics shakeout that led to the demise of Circuit City and a host of regional competitors. It's the last of the nationwide big-box consumer electronics retailers. But the slowing market for DVDs and CDs and competition from online rivals has dimmed its prospects.
Despite its turnaround efforts so far, industry watchers speculate that Best Buy may eventually go the way of Circuit City, the former rival that closed its last store in 2009.
The company's prospects make it a risky bet both for banks that may extend loans and for private equity firms that would consider investing in a buyout deal, said Michael Pachter, a research analyst at Wedbush Securities in Los Angeles.
To offset the high level of risk, private equity firms would require a compelling return on investment of at least 20% a year, an unlikely scenario considering the increasing power of online competitors, Pachter said.
"It's not like the Internet will go away," he said. "I don't think people are going to line up to invest."
Schulze resigned in June after a scandal involving Best Buy's former chief executive, but he remained the company's largest stakeholder with 20.1%, or about 69 million shares. Since then, rumors have circulated that he would make a takeover bid and try to turn around the company he co-founded in 1966.
In a statement Monday, Schulze implied that he has yet to secure the money needed for the deal, although he has held discussions with private equity firms that are interested.
"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 the statement. "After assessing all of my options, it is my strong belief that Best Buy's best chance for renewed success is to implement with urgency the necessary changes as a private company."
Best Buy confirmed in a statement Monday that it had received Schulze's letter, which it called "an unsolicited, highly conditional indication of interest." The board said it will "review and consider the letter in due course." Company spokesman Bruce Hight declined to comment further.
In April, Brian Dunn, then Best Buy's chief executive, resigned amid allegations that he engaged in an inappropriate relationship with a female employee. The board then voted to oust Schulze after an internal investigation discovered that he knew of Dunn's indiscretions months earlier and failed to report them.
"What makes matters more interesting is that the same board who asked him to leave earlier this year is now weighing his offer to buy the company," said Brad Thomas, an analyst at Keybanc Capital Markets in New York. "I think it's very much up in the air."
In his statement, Schulze said that he had hoped to negotiate privately with Best Buy but that "time is of the essence" to curtail further "loss of both value and talented leaders who are now uncertain of the company's future."
By publicly announcing his takeover bid, Schulze is pressuring Best Buy to open its books so possible investors can do an in-depth assessment of risk and move the process along, Thomas said. That may prevent a "chicken or egg situation" where the board does not want to reveal its financials before receiving a commitment from Schulze, and Schulze cannot make a commitment until private equity firms take a look at the company's financials.
Industry watchers say Schulze's letter is probably a prelude to negotiations with Best Buy with a conclusion that's hard to predict.
"The unwillingness of Best Buy's board to cooperate — hence the decision to go public with the offer — signals a long, drawn-out process that is no slam dunk of being completed," Brian Sozzi, chief equities analyst at NBG Productions, wrote in a note to investors.
Although Schulze wrote of developing a business plan that addresses Best Buy's many obstacles, industry watchers remain skeptical about his ability to turn the company around.
"Mr. Schulze was chairman during the time that Best Buy posted significant same-store sales declines," Thomas said. "If he has an amazing plan, why didn't he implement it earlier?"