Already Schulze has used Best Buy's struggles to lower his proposed bid, and the company's continued decline bodes well for a further price cut. With Best Buy agreeing to allow Schulze to conduct due diligence, his dithering should no longer be tolerated.
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 in August 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.
Meanwhile, investors are suffering as Best Buy drifts without direction amid an onslaught of competition from online electronics retailers like Amazon (AMZN) and as more popular destinations like Apple (AAPL) stores cut at its viability.Best Buy profit turned to losses from a 47 a cent share profit at this time last year, and same store sales declines appear to be accelerating. The company also cut its free cash flow range to $850 million to $1.05 billion for fiscal 2013, from previous forecasts as high as $1.5 billion, highlighting restructuring charges and negative working capital trends. Initially, Schulze's buyout offer was viewed skeptically by analysts because of vague language surrounding the billions in debt financing and private equity co-investment that the company's founder would likely need to take Best Buy private. After carrying around a financing letter from Credit Suisse (CS) and the purported interest of unnamed private equity investors, Schulze's Aug. 6 bid resembled Carl Icahn-like takeover choreography. In Schulze's case, he still needs to submit a valid offer for shareholders to even consider. Were 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 an August note reacting to the initial proposal. Lasser calculated 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. 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, an unlikely prospect given financing markets. 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. Nothing's changed from August, except for Best Buy's accelerating stock and financial woes. -- Written by Antoine Gara in New York
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