Seeking Alpha
Value, contrarian
Profile| Send Message|
( followers)  

Despite - or maybe because of - pervasive pessimism, Best Buy (NYSE:BBY) is a solid long, and its founder, and rumored bidder, Richard Schulze will be stealing away the company from shareholders if he's allowed to purchase the company.

Background:

Wall Street may be the financial capital of the world, but it may just as easily be the spin capital of the world. And why not? What better way to promote an overvalued asset than to praise it? What better way to lower the price of a prized asset than to deride it? With Schulze's $24-26 per share buyout bid (rumored to soon possibly be lowered), everyone - the media, the founder, and investment services companies like ratings agencies - is trying to convince the public and public shareholders that they should sell their shares and allow the company to enter private ownership. Shareholders, if nothing else, should at least treat these concerns with a healthy dose of skepticism and not accept these claims outright. If they do not, there is a risk that Schulze and other bidders (like private equity companies) could take the company private at a fraction of its intrinsic value, without paying a true premium to shareholders. Just as managements love IPO'ing companies when that company's line of business is trendy in the market, similarly managements love taking advantage of pessimism to take companies private at low prices. That way, the public gets bilked both on the way up and on the way down.

So, in this article I will examine three separate sources of spin, by citing: (1) quotations from the media; (2) quotations from the investment community, including the bonds rating agencies, and (3) quotations from Schulze himself. Even if you disagree with this article, you will most certainly agree that this is a fresh or contrarian take on the Best Buy saga. In addition, if by way of background you would like to see my original investment thesis on Best Buy, see my earlier Seeking Alpha article.

Quotations from the Media:

The media, even alternative media like zerohedge, portray Best Buy as a financially struggling, soon to be insolvent company. In this zerohedge article, the media feeds into the common perception that Best Buy's only hope is to sell the company to Schulze (regardless of price, it seems). Otherwise, the company is worthless and shareholders have nothing to benefit from owning the company. Instead the only way shareholders can benefit is to receive a one-time payment via buyout compensation from Schulze.

Quotations from the Credit Ratings Agencies and Analysts:

According to a Barron's article, a Jefferies analyst claimed that Schulze's bid is too low and would have to be in the high 20's or low 30's range for the board to find it acceptable. Yet the same analyst ranks the stock a "Hold". This begs the question, if Schulze's bid at $24-26 undervalues the company, why then is the stock a mere Hold at the market price of $19 and change (where it was trading at the time)? Clearly these are contradictory statements. The analyst states that a larger premium is necessary to " forego the execution risks associated with what will likely be a complicated 2-3 year turnaround." Just what "execution risks" he is referring to is not clear.

Standard and Poor's downgraded Best Buy's bonds to the BB range and issued a statement, an excerpt of which follows: "We estimate that a $9 billion transaction [an LBO] would result in pro forma debt leverage of about 3.8x [Debt to EBITDA] and EBITDA to interest coverage of about 2.5x." However the downgrade was prompted also by qualitative factors: "...our analysis will focus on our view of the secular changes in the industry and Best Buy's ability to adapt its model to those changes" (undoubtedly "showrooming"). The reader can consider for himself whether a 2.5X debt to EBITDA ratio is "junk"; offhand, it certainly seems as conservative if not more so than most recent LBOs.

As an aside, following the downgrade, Best Buy's 5.5% notes with a March 2021 maturity sold at 92.3 with a yield to maturity of less than 7% - an investment grade price. Also, it is unclear how much of S&P's concern is attributable to the financials of the transaction and how much is attributed to concern over Best Buy's perceived decline due to showrooming.

The ratings agencies seem to let the qualitative factors cloud their entire opinion of the company, as do analysts like the following.

Here is a typical analyst take:

I want some new guys in there, some new guys that understand what is really going on in retail, not the guys that essentially positioned Best Buy to fail, like they are right now, who in many respects did not anticipate this change," - Brian Sozzi, NBG Productions

OK, OK - will Schulze take my shares for $5? Maybe I should pay Schulze to take my shares?

I find it suspect that these same analysts did not foresee these industry changes that they now are so certain will grip Best Buy in death spiral. While reminiscing about a glorious past is easy, predicting the future is much more difficult. These analysts have shown that they are not capable of predicting the future - so why should they expect people to put much stock in their predictions now?

Quotations from Schulze:

Obviously, anyone seeking to purchase a company wants to do so at as low a price as possible. Schulze's statements certainly mirror those of the media and analysts/ratings agencies.

It is the sort of rhetoric one typically hears at a fire sale or auction, where a party wants the other party to quickly buy or sell, without deliberations. Schulze said, "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" (emphasis added). Yes - we get it - we shareholders must sell to you, at your price, and urgently, without delay. However, what are these miracle cures? As current shareholders should we have a right to know? And why can these changes only be implemented if Best Buy is privately held? All unanswered questions.

Conclusion:

Sometimes it's not a bad idea to slow down, pause, and take a deep breath. Even in this graph from a recent Seeking Alpha article (another run for the hills article), the author sought to highlight the trend in EPS estimates for Best Buy for this year.

While the trend is certainly downward, the company is still projected to earn more than $2.60 per share this year. On a $12 stock price, that's not bad, right?

Source: Unspinning The Best Buy Saga: Schulze The Vulture