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feynmansbastard
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Previously worked at top5 quantitative commodity fund. I now do value investing and event arbs. Also do short term algorithmic trading, and to this end created the popular open source trading platform http://tradelink.org
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  • How Will Best Buy's Q2 Miss Affect Founders Buyout?

    This morning Best Buy (NYSE:BBY) reported 90%+ (y/y) decline in earnings. This is a rainy day for BBY especially considering yesterday's ~10% sell off in response to naming a new CEO. Does this scuttle founder Richard Schulze's leveraged buyout attempt? Is there a rational opportunity for investors in all this drama?

    We know LBO's are financed by taking on a lot of debt that is paid back through earnings, generally on ongoing basis for senior debt or back-ended payments for higher yielding notes. If there is a depreciable change in BBY cash flows and profitability, founder Schultze will have a much harder time lining up the $7billion he needs from private equity to complete the buyout.

    In looking at the release BBY recorded a one-time restructuring charge of $90million related to store closings and layoffs, resulting in an ultimate net income of $12million for the quarter. This is against last year's Q2 earnings at ~$130million. So excluding the restructuring, BBY profits declined ~$25million or 20% year-over-year. This is still significant, but would not necessarily preclude an LBO.

    On the top line, BBY continues to having problems with same store sales shrinking. This is in contrast to retail leader and competitor WMT who has grown same store sales over the past year. Their new CEO's lack of any experience in retail sales is not what investors saw as the solution to this problem. BBY's stock is now at the same price it was before the buyout offer.

    Schultze and BBY management continue to go back and forth about how to proceed regarding his offer. Since he has not lined up all the financing yet, it can't really be viewed as a real offer at this point and at least partially why BBY has traded significantly off typical M&A pre-deal offer prices. We like founder Schultze's proposal for it's vision and long-term focus on the customer, but with BBY having more relative debt than it's more efficient competitors (WMT, AMZN) even before an LBO, the lack of a clear plan and financing leads us to believe betting on the LBO is speculative at best.

    We do note that if the LBO occurs at least $24 by march, you can make some excellent returns in the option market at present for a relatively small investment. However for us there is too much uncertainty to evaluate what is appropriately "small".

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 21 1:10 PM | Link | Comment!
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