This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

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) 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.

Stock quotes in this article: BBY, AMZN, CLX, IEP, CS 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 +2.54 0.14%
NASDAQ 4,095.5160 +9.2910 0.23%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs