Shares of Best Buy (BBY) ended a volatile trading week largely unchanged. Shares spiked up sharply on Thursday after reports circulated that founder Schultz had lined up financing to make an offer for the firm. On Friday, a press release from the company indicated that a possible deal might still be far off.
Thursday's Media Reports
On Thursday, shares of Best Buy rose as much as 17% after media reports circulated that founder Richard Schulze finally arranged financing for a deal. Media reports indicated that Schulze might offer $5 to $6 billion for the troubled electronics retailer. A possible offer might value the firm between $15 and $18 per share.
Best Buy has been in play since August, when Schulze first announced his intentions to take the company private. At the time, he was indicating that an offer might value the company between $24 and $26 per share. At the midpoint of the range, Best Buy's equity would be valued around $8.5 billion. A potential offer would furthermore assume $2.4 billion in debt of the company, for a total deal value of around $11 billion.
Shares have fallen significantly from that point in time as a result of continued same store sales declines. An offer in the range of $15-$18 per share might represent a 37% premium compared to Friday's closing price. Yet many institutional investors and the board of directors might not be willing to sell the firm at such a low price. Investors have been burned already this year with shares having lost half of their value in 2012.
On Friday, shares quickly gave up Thursday's gains. Best Buy issued a press release that it has extended the deadline for a bid from Schulze to February 28. The extension increased uncertainty whether a possible deal would go through altogether. Many commentators have questioned whether Schulze could line up the financing of the bid. Many large parties were reportedly reluctant to provide financing.
In the press release Best Buy cites that both parties believe that allowing Mr. Schulze to make his potential offer after the holiday season and fiscal year is in the best interests of shareholders.
This provides Mr. Schulze and his potential partners with an opportunity to include the Company's full year results as a part of their due diligence review.
As a result of the extension, Schulze will be able to submit an offer any time during February. Best Buy's Board of directors will have 30 days to review and make a decision on a possible bid.
Third Quarter Results
Many investors and shareholders look anxious for any signs about Best Buy's performance during the important holiday season. At the presentation of its third quarter results on November, shares fell 13%.
The company missed on both revenue and earnings expectations. Best Buy reported a 3.5% decline in revenues driven by a 4.3% decline in same store sales. The company reported an unexpected loss. Best Buy lost $13 million during the third quarter.
The poor results going into the holiday season and the fact that Schulze and his partners want to await the holiday sales numbers do not predict much good.
Best Buy has been struggling for a long time already. Shares are trading 80% down from their highs of $60 set back in 2006. Intensified competition from names like Amazon.com (AMZN) has lured shoppers from traditional brick-and-mortar stores to go and shop online.
It is not just Best Buy which has not been able to formulate a credible strategy to deal with this threat. Competitor RadioShack (RSH) has been struggling likewise.
Investors should hope that Schulze continues to keep faith in the company and can arrange financing to close a deal. His emotional attachment to the firm is a big plus for shareholders. Given the acceleration in the deterioration of operating performance, many private equity firms would have already given up on the company.
In November I expected that if Schulze could set away his emotions, he would pull the offer. Potential buyout prices keep falling, so the new delays are a big red flag for shareholders. Opportunistic investors could pick up shares at these levels and bet on a 30-50% acquisition premium. Be aware that lack of a deal exposes you to significant downwards risks.