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p>This week, Best Buy Founder and former Chairman, Richard Schulze, made an unsolicited offer to buy the electronics retailer and take it private. With all the makings of a made for TV movie, the intriguing dynamics at play here make it worthwhile to set the scene for the drama that is likely to play out over the next several weeks:

  • Schulze founded Best Buy in 1966 and turned it into the largest electronics retailer in the United States;
  • Schulze was forced out of his role as Best Buy’s Chairman just 2 months ago, after it was discovered that he failed to disclose to the board of directors that former CEO Brian Dunn (who resigned in April) had told him about his inappropriate relationship with a female employee.  It was a corporate governance nightmare that Best Buy’s Board was hoping to close the books on;
  • The offer by Schulze, who happens to be Best Buy’s largest shareholder with a 20.1 percent ownership stake, is for $24-26 per share in cash.  That share price sets the potential of an $8.84B buyout – which would make it the largest buyout ever of a U.S retailer (topping Toys R Us in 2005);
  • Although Best Buy appears to have survived the downturn for national consumer electronics retailers that has led to the closing of stores such as Circuit City and Tweeter, the chain has struggled lately with the recent announcement that it plans to close 50 stores and lay off more than 400 workers.   The company recently announced a 26 percent drop in first quarter profit.  The news of Schulze’s offer raised the share price of Best Buy stock over 13 percent to almost $20;
  • Schulze is trying to paint the Best Buy Board of Directors into a corner by claiming that now “is the moment of truth” for the company and that immediate and substantial changes are needed to return it to its leading ways.  He also claims that his offer comes after repeated requests to the board to provide him with due diligence information.  To its credit, Best Buy has not yet taken the bait.  In a statement released through its public relations department on Monday, the company offered the following: “Best Buy’s Board of Directors will review and consider the letter in due course, consistent with its fiduciary duties, in consultation with its financial advisors….and will, as always, pursue the best course for its shareholders.” 

In my opinion, the buyout, as currently proposed by Schulze, will not go through because of financing.  Although he claims to be working with private equity firms and Credit Suisse, Schulze has yet to secure the necessary financing for the deal.  I am skeptical as to whether he can secure financing for his plan to turn around an electronics retailer that continues to struggle and is now competing with the likes of Apple and online retailers.  As Brad Thomas, an analyst at Keybanc Capital Markets put it, “Mr. Schulze was chairman during the time that Best Buy posted significant same-store sales declines.  If he has an amazing plan, why didn’t he implement it earlier.”

There is also an element of revenge here – specifically, the ability for Schulze to oust the board of directors who got rid of him just a couple of months ago. Revenge is rarely a logical motive for investors who would want to support a multi-billion dollar deal.  Nevertheless, the offer itself likely sets the stage for the eventual transition of Best Buy to a private company as the writing seems to be on the wall for Best Buy’s Directors and shareholders that it cannot survive as currently situated.  The corporate board members of Best Buy are well aware of their board member responsibilities and the need to act at all times in the best interests of the shareholders; that time is quickly approaching.

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