Best Buy Co. (BBY:US) founder Richard Schulze, who stepped down as chairman in June, offered to take the electronics retailer private at $24 to $26 a share. The stock had the biggest gain in almost a decade.
Credit Suisse Group AG, Schulze’s financial adviser, is confident it can obtain financing for an offer, according to a letter sent to the board today. The offer is at least 36 percent more than Best Buy’s closing price Aug. 3, and the midpoint of the range gives the company an equity value of $8.5 billion.
Schulze, who held (BBY:US) more than 20 percent of Best Buy as of June, plans to contribute $1 billion in equity from that stake, the letter shows. The rest of the money will come from what the letter calls “premier private-equity firms with deep experience in retail who are interested in a possible acquisition of Best Buy” and debt financing. The Richfield, Minnesota-based electronics chain had about $1.7 billion in long-term debt (BBY:US) as of May 5, according to regulatory filings.
“I have been actively exploring all available options for my ownership stake,” Schulze, 71, said in the letter. “That exploration has reinforced my belief that bold and extensive changes are needed for Best Buy to return to market leadership and has led me to the conclusion that the company’s best chance for renewed success will be to implement these changes under a different ownership structure.”
Best Buy confirmed in an e-mailed statement that it had received the letter from Schulze and said its board would consider it “in due course.”
Best Buy climbed 17 percent to $20.78 at 9:52 a.m. after surging as much as 22 percent for the biggest intraday gain since October 2002. The shares fell 25 percent this year through Aug. 3.
Through a spokesman, Schulze declined to comment on the letter.
Schulze is seeking the board’s (BBY:US) permission to conduct due diligence on the electronics retailer and form a group including private-equity funds and other executives that would make a more complete offer. Under Minnesota corporate law, Schulze needs permission from company directors to form such a group. His offer will have no deadline as yet, and it’s subject to being able to conduct due diligence.
“With the board’s agreement that I may work together with potential private equity partners and former senior executives, and with timely access to relevant non-public company information, I am confident that the necessary due diligence could be completed expeditiously and a binding agreement to acquire Best Buy could be reached quickly,” Schulze said. “I am prepared to enter into a customary confidentiality agreement and begin work immediately.”
Schulze has negotiated unsuccessfully with the board for the past several weeks, seeking permission to conduct due diligence and form a bidding group, said a person familiar with the matter. Best Buy’s board told Schulze it wasn’t a good time to go private because it was looking for a new CEO, and asked for three more weeks to consider the matter, said this person.
No private-equity firms are named in the letter, yet Schulze has sought out and received interest from funds that want to be part of his effort, said this person. He would likely have two buyout firms backing his offer, said this person.
“Schulze did not want the major restructuring plan on tap being embraced by the market, causing a higher takeover price,” Brian Sozzi, an independent analyst in New York, wrote today in a note to clients. “There is minimal confidence in the interim CEO turning around the brand.”
Schulze, who spent almost half a century with the company, resigned as chairman in June after an internal probe found he acted inappropriately in handling allegations about then-CEO Brian Dunn’s relationship with a female employee. Schulze said when he resigned that he would consider all options, including selling his stake.
Former Best Buy Chief Executive Officer Brad Anderson and former President and Chief Operating Officer Allen Lenzmeier have expressed interest in rejoining the company as part of a buyout, according to the letter. Other former executives, such as J.D. Wilson, who was senior vice president of enterprise capabilities, have spoken to Schulze about joining his effort.
“He is talking to people he trusts,” Wilson said in an interview in July. “There is a small group he’d like to have with him in righting the ship. He is serious as a heart attack.”
Wilson told Schulze, who called him in June, that he would be “raring to go” if he was able to buy out the company.
Schulze would need to raise $1 billion to $2 billion from a private-equity firm and $7 billion to $8 billion in debt, said Anthony Chukumba, an analyst at BB&T Capital Markets who rates Best Buy shares hold.
A takeover of Best Buy would have to be at least $30 a share, for a total value of about $11 billion including net debt, to persuade long-time investors to sell, Chukumba said in a phone interview July 30.
Best Buy has struggled as customers migrate to Amazon.com Inc. (AMZN:US) and other online merchants. The retailer posted a net loss (BBY:US) of $1.23 billion on revenue of $50.7 billion for the year that ended in March, its first annual loss since 1991, data compiled by Bloomberg show.
To trim costs, it’s now shutting 50 big-box locations in the U.S. this year while upgrading its website and accelerating the opening of stores to sell mobile phones.
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