Best Buy: A Great Arbitrage Play With Up To 30% Upside

| About: Best Buy (BBY)

Best Buy (NYSE:BBY) founder Richard Schulze moved further when he announced that he has plans to take the company private. Schulze has publicly stated several times before of his intention to take the company private. However, his recent announcement mentioned he planned to take the company private at a share price between $24 - $26. His announcement shows that he is in fact serious regarding a buyout and has already scouted PE firms and various other investors to get the financing necessary.

Bid Amount

Currently, Schulze already owns 20% of the outstanding shares. He is looking to purchase the remaining 80% of the shares. Schulze said he plans to offer investors somewhere between $24 - $26 per share.

Discount to Bid

Even assuming that Schulze lowballs the offer at $24 per share, that is still a 20% premium over the market price. At $26 a share, it would be a 30% premium over the market price.

Capital Requirements

Schulze plans to put a $1 billion of his own capital in. However, the issue seems to be the lack of detail on how Schulze plans to get the remainder of the capital. While the idea of getting funds from PE firms has been brought up, there has been limited detail communicated to shareholders.

Market Reasoning

The market seems to be trading at a discount to the bid price for the following reasons:

  • Board of Director Approval
  • Share price under 52-week high
  • Lack of interest by financiers

The Board of Directors have told Schulze to go perform due diligence and submit a proposal then. I believe the current board is not taking him seriously as Schulze has not actually given proper details about his intentions for his bid.

The other reason that Schulze may have a difficult time convincing the board is simply because the offer could be too low. The shares had a 52-week high of $28. Schulze's bid may not get enough steam if shareholders and the board keep holding onto a higher price.

The most important issue that the market keeps asking is "Who is willing to finance Best Buy?"

While there exists valid doubts for a buyout, the market may be overreacting in applying such a discount to the buyout price.

While the BOD may not be in favor of Schulze's proposal, the shareholders will ultimately decide what they plan to do with shares. A $24 - $26 offer would actually be considered reasonable based on the future of the company. There is no doubt that Best Buy will see declining sales. It would be unwise for the BOD to reject Schulze's offer if they believe they can engineer a turnaround. The only real strategy the directors have provided for a turnaround are to simply close more stores and lay off employees.

Even though Best Buy's offer is not even close to its 52-week high, investors may be better off accepting Schulze's offer and locking in any upside they can get. Best Buy cannot simply compete with companies like Amazon (NASDAQ:AMZN) and its pricing model.

In regards to concerns over financing, Schulze has already stated he has met with numerous PE firms. He has even hired Credit Suisse has an advisor. CS is confident that Schulze will be able to secure the necessary financing needed.

I strongly believe Best Buy will get the necessary backing since the company is still fairly profitable. Analysts are expecting the company to generate over $1.2 billion in net income this year. PE firms may provide funding if Schulze gives them favorable terms.

Best Buy is a great arbitrage play currently. There is a chance of 30% upside and downside could be limited. The shares are still trading at a low multiple. The market seems to be very pessimistic of a buyout. However, if PE firms and institutional investors are confident about Best Buy, the company will have no trouble getting the financing needed. Shareholders should understand that the brick and mortar model is no longer competitive in this environment. There could be very well be a favorable vote for a buyout if Schulze makes a strong proposal.

Disclosure: I am long BBY.

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