Best Buy Co. (BBY:US) founder Richard Schulze is still exploring a buyout offer for the retailer and is likely to seek a 30-day extension to conduct due diligence, according to two people with knowledge of the matter.
Potential private-equity investors have become more concerned about participating in a deal as Best Buy’s stock price drops, said the people, who asked not to be identified because the matter is private. Best Buy’s board (BBY:US) may be more likely to back an offer from Schulze after recent earnings reports, another person said.
Best Buy tumbled to its lowest price (BBY:US) in a decade today after a Citigroup Inc. analyst said initiatives to turn around the company may not be enough to fend off online rivals. Schulze, Best Buy’s former chairman (BBY:US), offered to take the electronics retailer private at $24 to $26 a share in August. He later reached an agreement with Best Buy to examine the company’s financial information over a 60-day period. That is set to expire in the coming days, two people said.
“Schulze is an insider and doesn’t need more time for due diligence,” Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor, said today by e-mail. “He needs more time to line up financing. Unfortunately for Schulze the time he needs to line up solid financing is working against him because the news at Best Buy is getting worse.”
Matt Furman, a Best Buy spokesman, declined to comment.
Best Buy dropped 9.8 percent to $13.75 at the close, the lowest price since 2002. Through yesterday, the stock had lost 35 percent this year (BBY:US).
Best Buy posted a $1.2 billion net loss in its latest fiscal year and said last month that fiscal third-quarter profit would probably be “significantly” below last year’s results as sales at established stores decline. It is scheduled to report quarterly results Nov. 20.
Joly’s turnaround plan may be undermined by intensifying competition and costs of the effort, according to analysts at Citigroup and Wedbush Securities. The retailer plans to match rivals’ online prices during the holidays while taking steps to boost purchases by visitors to its website, Joly said in an interview at Bloomberg News headquarters in New York Nov. 14.
“These initiatives may still not be enough to compete with major online competitors,” Kate McShane, a Citigroup analyst in New York, wrote in a note yesterday. She rates Best Buy as neutral, equivalent of a hold recommendation.
Michael Pachter, an analyst at Wedbush Securities in Los Angeles, said in a note Nov. 15 he expects “disappointing results and weak guidance to pressure Best Buy shares, with further earnings pressure once the company begins spending on new initiatives.” He rates Best Buy the equivalent of a sell.
Best Buy’s management is “best served keeping expectations low in the short term, while getting back to the basis in the medium term.” said David Schick, a Stifel Financial Corp. analyst in Baltimore who recommends holding the shares.
Joly, who took charge in September, said spending more to train employees is aimed at providing expertise consumers can’t find online, as well as encouraging additional sales of accessories such as batteries and services. The effort, dubbed “Renew Blue,” after the shirts worn by employees, also plans to reduce the amount of store space allotted to slow-selling items such as DVDs while assigning more employees to busy days.
Such steps may generate an additional $450 million in annual operating profit, Best Buy told analysts.
“While we need to reinvent ourselves, there is also some low-hanging fruit,” Joly told reporters Nov. 13. “There is a sense of urgency. We are moving quickly to have an impact. How much time it will take to see the results, I do not know.”
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