Best Buy: Schulze Is Fooling Shareholders

Dec.14.12 | About: Best Buy (BBY)

Rumors of Best Buy (NYSE:BBY) being bought out have been going on for a prolonged period of time now. Richard Schulze, the company's founder and former chairman, has insisted he plans to make a bid for Best Buy. However, there is one issue with this. He has very little backing from various financial institutions. Schulze, who controls 20 percent of the company's stock, still needs equity financing from private equity firms and banks to help take the company private.

It's very unlikely that Schulze will be able to take Best Buy private at a price point that current management would be willing to accept. Initially, Schulze offered to take the company private at $26 per share, however, given the current stock decline, it seems he has lowered his bid. If Schulze is somehow able to obtain the necessary financing needed, there is no guarantee management will even consider the bid if he lowballs it.

Just a few months ago, Best Buy also announced Hubert Joly as the new CEO for the company. Joly and senior management are currently working on a turnaround plan. It's very unlikely that Best Buy would consider an offer from Schulze, when management is planning their own turnaround.

The biggest issue for Schulze is not the willingness of the Best Buy board to accept his offer, but rather the probability of even obtaining the necessary financing needed. Private equity firms have fairly stringent requirements when acquiring a company. Most of these firms are trying to see significant returns for their investment. Many of them are also known to turn around failing businesses with operating inefficiencies. However, Best Buy's decline is happening at no fault of its own, but because the overall industry is failing. Big-box retailers are taking a hit and are being forced to downsize their operations.

Private equity firms can turn around failing businesses, but when an entire industry is shifting direction, not many firms will be willing to commit a significant chunk of capital. Even if PE firms were somehow brought into the deal, they would not be willing to pay a premium to the current share price or even near the current price.

Schulze has pushed back his timeline for a bid until February, which might explain the fact that the process of getting financing is more difficult than initially assumed. Shareholders should not look to a bid from Schulze as an exit opportunity. There are many hurdles that Schulze needs to go through before he even brings a reasonable bid to the table. It will be hard for him to find partners who will be willing to pay a premium to the company's current share price.

Even if Schulze makes a bid, the recent moves by management show that they still plan on restructuring the company on their own. The hiring of a new CEO will mean he will be given adequate time in order to plan a proper restructuring. The only way I could see the BOD of Best Buy accepting a bid is if it has a nice premium over the market price. I do not see this scenario happening though. If shareholders are waiting for a bid, they should sell now. The recent extension by Schulze shows there is just way too much uncertainty if a bid even happening.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.