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Schulze's $8.8 Billion Best Buy Deal Has Icahn-Like Strings (Update 1)

Meanwhile, Schulze's buyout pitch contains a string of caveats that signal Icahn-like gamesmanship in unfriendly buyout negotiations. "I have made repeated requests to the Board for several weeks to provide me with due diligence information and the consent to form a group required under Minnesota law, both of which will be necessary to reach a definitive agreement," wrote Schulze in the Aug 6 letter.

"While I preferred a private negotiation, time is of the essence. I am deeply concerned that further delay and indecision will cause additional loss of both value and talented leaders who are now uncertain of the company's future," he added.

Schulze stressed that the proposal would most likely materialize as a formal offer if the board allowed him to conduct due diligence on the finances of the company he founded decades ago. Meanwhile, the offer's only certainty is Schulze's existing $1 billion in stock that he is willing to include in a buyout -- Schulze is Best Buy's largest shareholder.

Citigroup analysts estimate that a prospective deal hinges on what's likely to be up to $5 billion in debt financing from Credit Suisse and $4 billion more in investment from a private equity consortium.

Schulze didn't disclose any actual financing commitment from Credit Suisse or whether any buyout money has been raised and instead said generically that the investment bank "is highly confident it can arrange the necessary debt financing." Meanwhile, the notion of a consortium of private equity investors in a share buyout of Best Buy cuts against a slowing in so-called "club deals" since the financial crisis. Investors would also need to make a big bet on Best Buy's turnaround, amid an onslaught of online competition.

In 2012, Best Buy lost $1.2 billion as margins and sales struggled to grow -- its first annual loss since the early 1990s. Meanwhile, the Richfield, Minn.-based retailer has also been hit by management change, including Schulze's departure.

In June, Schulze resigned from his chairmanship of Best Buy after the company's board said he acted improperly in handing "personal conduct" improprieties, which caused CEO Brian Dunn's ouster in April.

The key will be for debt and private equity investors to agree with Schulze's assertions that he and other former executives can turn the business around. On both fronts, the proposal appears challenged.

Citigroup analyst Kate McShane notes that while the possibility of a Best Buy takeout has risen to 50% from 20% prior to Monday's disclosure, the prospect of a stretched debt market remains a key risk, in addition to little clarity on private equity investment and the company's willingness to proceed. McShane noted that subtracting the $1 billion in Schulze's equity stake leaves a deal of $7.8 billion to be financed, of which Citi estimates $2 billion to $3 billion in private equity is available. Using data from Citi's Event Driven Desk, that would still require $4 billion to $5 billion in debt, and Citi calculates that buyout debt has been stretched at $3 billion to $4 billion in recent deals.

In May, privately held beauty conglomerate Coty failed in a $10.7 billion deal for Avon Products (AVP), even after receiving an equity financing commitment from Warren Buffett-run Berkshire Hathaway (BRK.A).

Best Buy's entire business model is also seen as becoming increasingly at risk as retailers like Amazon (AMZN - Get Report) offer lower prices online and are using smartphone applications to actually allow savvy tech consumers to price shop while in Best Buy stores. While private equity investors may value the company's free cash flow, it may not pre-empt the investment that Schulze's Monday proposal indicates.
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