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Best Buy Earnings: You Break It, You Best Buy It

(Best Buy earnings, buyout story, updated to reflect analyst comments and additional company data)



NEW YORK (TheStreet) -- After Best Buy (BBY) reported worse than expected second quarter earnings and declined to provide any outlook on the year's second half, it's time for the company's founder and former chairman to put up or shut up on a takeover offer that could reach nearly $9 billion.

On the heels of the top and bottom line earnings miss on Tuesday -- in addition to Best Buy's suspension of earnings guidance and a share buyback program -- both the company and founder Richard Schulze need to get serious about whether a private takeout is in the cards, after months of speculation. Investors are now more likely than ever to accept a premium-priced buyout offer as Best Buy's shares tumbled to a value as low as $16.31 in early Tuesday trading -- their lowest level since 2002 -- though shares made up much of the early 10% dip by Tuesday afternoon amid heavy trading.

The take-private deal unveiled by Schulze on Aug. 6 hit new snags on Monday, when Best Buy said Schulze declined to conduct due diligence in his $24 to $26 per share buyout proposal.

Schulze had publicly challenged a seemingly hesitant Best Buy board to open its books since announcing his takeover offer. The big box electronics retailer said on Monday that Schulze didn't accept the company's offer to open its books and waive Minnesota laws that would prevent a private equity buyout proposal, a move that caused analysts to question whether the bid has stalled, and precipitated a freefall in Best Buy shares that continued after Tuesday's earnings.

The gamesmanship continues on both sides of the Best Buy divide: Schulze contends he wants to move fast on a takeover as the Richfield, Minn.-based company's earnings tumble. The Best Buy founder argues he can't sit on an offer until January -- a look at the books would entail deferring a takeover proposal or tender offer to 2013.

The jury remains out on whether Schulze is a legitimate bidder, but his complaint that timing is everything isn't without merit. Liquidity at Best Buy appears to be a concern after the company reported a 67% drop in cash to $680 million from the year-ago level. Still, Best Buy said it expects to earn $1.25 billion to $1.5 billion in free cash flow for the year, a cash generation level that may yet appeal to the debt and private equity investors needed to make a private takeover happen.

In a complicated dance between Schulze and his former company, one thing is clear: Shareholders and analysts aren't buying into either Best Buy's turnaround story or its M&A prospects.

Best Buy left investors and analysts scratching their heads on Monday when it announced the hiring of Hubert Joly, the former head of hotels operator Carlson Companies to be its CEO, replacing interim chief executive Mike Mikan.

"We find Mr. Joly's resume unimpressive, and believe he lacks sufficient experience to engineer a turnaround at Best Buy," wrote Wedbush Securities analyst Michael Pachter in a Monday note to clients. "Should the buyout discussions resume, we would continue to view a buyout by Schulze as unlikely," the analyst added.

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