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

There is reason for investors to take a Schulze takeover attempt seriously if one ever surfaces. The 46-year company veteran's offer now represents a near-60% premium to current Best Buy share value. Meanwhile, Schulze's record and his stated intention of bringing long-time executives back to Best Buy may be a better turnaround solution than newly hired CEO Carlson, whose experience isn't in electronics retailing.

In his buyout proposal, Schulze said that former Best Buy executives Brad Anderson and Allen Lenzmeier would "be interested in rejoining the company," potentially restoring a management team that made Best Buy into a leading electronics retailer.

During the period from 1991 through 2009, when Schulze, Anderson and Lenzmeier led Best Buy, the company's revenues increased from approximately $900 million to over $45 billion. Earnings before interest, taxes, depreciation and amortization (EBITDA) increased from approximately $30 million to $2.9 billion, Schulze noted in his proposal.

Were Best Buy to allow Schulze to proceed without any more gamesmanship, 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 financing fronts, though, the proposal appears challenged.

"Even if the offer is deemed sufficient by Best Buy's board, there are still significant questions about the ability to raise the necessary financing," wrote UBS analyst Michael Lasser in a note reacting to the initial proposal. Lasser calculates that to raise the equity portion of the deal, a consortium of up to five private equity firms contributing up to $600 million apiece might be needed.

There is also uncertainty as to whether Best Buy's balance sheet and declining profitability can withstand the pressures of a debt-fueled buyout. Earlier in August, ratings agency Standard & Poor's downgraded Best Buy's bonds to BB+, a sub investment grade rating otherwise known as "junk," as a result of Schulze's proposal.

Citigroup analysts initially estimated 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. But analyst Kate McShane notes that debt financing would still require $4 billion to $5 billion in debt, and Citi calculates that market's ability to provide buyout debt has already been stretched at $3 billion to $4 billion in recent deals.

Both Lasser and McShane maintained neutral ratings on Best Buy shares and price targets of $20 and $21, respectively -- far below Schulze's prospective offer.

Having worked at the retailer for nearly 50 years, the company's founder has a strong hand yet to play in any turnaround pitch to shareholders, financiers and private equity funds. But after making his initial Icahn-like proposal, Schulze now needs to go all in or walk away from the table.

For more on potential large buyouts, see details on why reports of LabCorp's (LH) takeover hinge on a pre-bust M&A market.

-- Written by Antoine Gara in New York
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