News Column

Best Buy Founder Schulze Faces a Big Decision

February 26, 2013

Thomas Lee

best buy

It's decision time for Best Buy founder Richard Schulze.

Will he make an offer? Could he walk away? Whatever he does by the Feb. 28 deadline for a bid, the move will have a lasting impact on the world's largest consumer electronics retailer.

Should he make a bid and acquire Best Buy Co. Inc., the publicly traded company will return to its roots as a private chain of stores run by its original brain trust of Schulze, former CEO Brad Anderson and former President Al Lenzmeier. If he abandons his efforts to get his company back, he will cede the future of Best Buy to a new group of executives led by CEO Hubert Joly, who must redefine the electronics retailer for the digital age under the impatient scrutiny of shareholders.

"I think it would be a mistake (to go private) now," said David Strasser, an analyst with Janney Capital Management. "It's pretty obvious (Joly and his team) are focused on shareholder value."

But Schulze could go a number of other directions, say analysts, consultants and investors who follow the company. Here are five scenarios Schulze could pursue and how they might play out:

SCENARIO 1: Schulze makes an offer.

Since Best Buy stock is trading at about $17 a share, investors and analysts say Richard Schulze will need to offer at least $21 a share. The company could either negotiate with Schulze or let the offer stand. After 30 days, Schulze can seek shareholder approval or endorsement by calling a special shareholders meeting or change the board of directors through a proxy campaign leading up to the regular shareholders meeting in June.

Pro: If the deal goes through, investors get an immediate payout for their shares and Schulze can operate his company without "shareholders breathing down his neck," said Laura Kennedy, an analyst with Kantar Retail consulting firm in Boston. "Taking it private may still be best for the company. All of the forces that have challenged their business are still there."

Con: The prospect of a protracted proxy war between the board and Schulze continues to distract Best Buy and threatens to undo its fragile recovery.

Probability: Medium. Schulze may have already missed his chance to buy the company cheaply in December, when Best Buy traded as low as $11.40. And since Best Buy sales have stabilized, Schulze may have lost his rationale for taking Best Buy private.

SCENARIO 2: Schulze recruits minority investor.

Schulze gets an outside investor to purchase a stake in Best Buy and try to win a seat on the board. Schulze already has two seats.

Pro: Schulze strengthens his control over the company without having to borrow billions of dollars to acquire Best Buy.

Con: Depending on how many shares the investor acquires, it may not be enough for the board to grant the investor a seat.

Probability: High. After months of delays, Schulze and Best Buy say their prolonged dance actually produced something. A well-respected investor buying a sizable piece of Best Buy can fortify the company's share price. "It shows Mr. Schulze and his potential investment group's confidence in the new management team," Alan Rifkin, an analyst with Barclays, wrote in a recent research note.

SCENARIO 3: Schulze does nothing.

Confident that Hubert Joly is the right man to lead Best Buy, Schulze keeps his 20 percent stake and rejoins the board.

Pro: If it ain't broke, then don't fix it. Plus he can always try to buy the company again next year.

Con: After dragging Best Buy through months of uncertainty and spending lots of money on lawyers, investment bankers and public relations officials, Schulze loses lots of credibility for failing to act.

Probability: Low. Despite Best Buy's improved health, a source close to Schulze insists he will do something this week, if not make an outright buyout bid. "We're in the final throes," the source said. "It's all going to happen." What exactly "it" means is far from clear.

SCENARIO 4: Schulze sells, leaves company.

Unable to buy the company and frustrated with its leadership, Schulze decides to sell off his stake and departs. Schulze already "drew that line in the sand" when he quit the board last summer, said Michael Pachter, an analyst with Wedbush Securities. In other words: If you don't agree with me, then I will leave.

Pro: No more stress and conflict. Plus Schulze can claim a degree of credit for helping to right Best Buy, David Strasser of Janney Capital said. Without his agitation, would Best Buy be in the improved situation it enjoys today? Schulze's departure will also allow Joly to act with a free hand.

Con: No one knows Best Buy better than its founder. The company will lose the insight and experience of a man who almost single-handedly built a retail empire.

Probability: Next to zero. Who are we kidding? Schulze will be forever attached to his baby.

SCENARIO 5: Sides agree to another extension.

The company and Schulze already extended the deadline twice, so why not a third time?

Pro: An extension could be advantageous because Schulze and the private equity groups could get better terms for a deal to buy the company.

Con: Does anyone really want to see this saga drag on for several more months? Investors could get tired of the uncertainty and dump the stock.

Probability: Low. If Schulze can't seal the deal now, he probably never will. An extra few months won't really change anything.

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BEST BUY TIMELINE:

-March 2012: Best Buy announces plans to close 50 superstores and lay off several hundred employees.

-April: S&P puts Best Buy's corporate credit rating on watch, in line for possible downgrade to "junk" status.

-April 10: Best Buy CEO Brian Dunn abruptly resigns. The company acknowledges it has initiated an investigation of Dunn; Best Buy director G. "Mike" Mikan is named interim CEO.

-May 16: Best Buy board releases results of investigation, says board chairman and company founder, Richard Schulze, failed to alert full board to allegations against Dunn.

-June 7: Schulze resigns early from board of directors to explore his options; board member Hatim Tyabji is named chairman.

-July 31: Star Tribune confirms that Schulze has recruited former Best Buy CEO Brad Anderson and former President and COO Allen Lenzmeier to join his takeover team.

-Aug. 6: Schulze submits a preliminary takeover proposal to Best Buy's board. He suggests an offer of $24 to $26 a share.

-Aug. 20: Best Buy announces it has hired Hubert Joly from Carlson as CEO.

-Oct. 10: Joly agrees to let Schulze interview Best Buy executives.

-Nov. 21: Joly and Schulze's team meet to share their points of view about the company in a substantial way.

-Dec. 14: Best Buy and Schulze agree to push back a Dec. 16 deadline for Schulze to make an offer to buy the company, leading some analysts to speculate that Best Buy is more willing to make a deal.

-Dec. 31: Best Buy Co. announces that directors Mikan and Matthew Paull are stepping down from their leadership roles with the company.

-Jan. 11, 2013: Sales at Best Buy stores open for at least a year in December were flat compared with the same month in 2011. The performance is viewed as a victory for Best Buy, considering the fierce competition from Wal-Mart and Amazon over the holidays.

-Tuesday: Best Buy announces it will cut 400 jobs at its Richfield, Minn., headquarters. Stock closes at $16.46, up 35 percent since Dec. 12.



Source: (c)2013 Star Tribune (Minneapolis) Distributed by Mclatchy-Tribune News Service.


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