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Best Buy: A Cynical March to a Buyout

NEW YORK ( TheStreet) -- Best Buy (BBY) founder Richard Schulze may be set to finally make a takeover offer for the struggling electronics retailer. It's too bad for shareholders that his four month long, asinine deal dance may eventually work.

TheStreet initially compared Schulze's early August "proposal," which wasn't a formal takeout offer, to the gamesmanship Carl Icahn often wields in takeover plays such as Clorox (CLX). But it increasingly seems the comparison was unfair to Icahn, who can be counted on dish out substance and shareholder value creation along with his antics.

From the start, Schulze's "proposal" of a Best Buy buyout of between $24 and $26 a share was laden with strings attached. Now, reports from the Minneapolis Star Tribune indicate Schulze may offer between $5 billion to $6 billion for Best Buy, as he tries to bring the deal to close with a lowball formal offer that looks nothing like the terms proposed just months ago.

At best case, Schulze's offer may come in 30% less than his initial proposal, which valued Best Buy shares at $8.8 billion. That $6 billion bid may seem like a relief to shareholders given that the company's shares stood at $12.18 a share as of Wednesday's close and its market cap of little more than $4 billion. Best Buy shares surged over 15% in early Thursday trading.

But Shulze may just being throwing a lifeline to Best Buy shareholders after tossing them overboard.

A closer look at the chronology of Best Buy's takeover play indicates there was no good reason for Schulze's initial specious bid to have ever made it to the company's board and shareholders. After all, there was nothing to vote on.

When Schulze made his first "proposal," he said a deal as high as $26 a share already had the financing of investment bank Credit Suisse (CS) and a consortium of unnamed private equity firms. All Schulze said he needed was the ability to conduct due diligence and the support of management to wave arcane Minnesota-state laws surrounding M&A, according to a letter to company management.

Schulze's claim that due diligence was a necessary precursor to a formal offer seemed sketchy from the outset - he after all founded and chaired the company. Still, Best Buy relented and opened its books.

In retrospect, it's hard to see Schulze getting any special insight into Best Buy's finances in his supposed due diligence that goes beyond the two horrendous quarters of earnings the company publicly reported since his proposal was first floated.

How will Schulze justify to Best Buy management or shareholders a reported 30%-plus price cut on the offer?

The reality is Schulze can't explain what drove his initial proposal lower, other than a wait-and-see approach to Best Buy's earnings going into a make-or-break holiday season for the company.

There's an obvious alternate narrative to the whole process: Schulze was playing a parlor game and now has the company's management and investors with no hand left to play.

NBG Productions chief equities analyst Brian Sozzi says the reports of an imminent bid by Schulze are likely to materialize in something tangible for investors by year end. "He'll make the offer soon. You'll see that rejected and another bid in January," says Sozzi of how he expects Schulze's takeover to play out. While Sozzi says Schulze may open his offer at as low as $17 a share, he's likely to convince management and investors to sell at roughly $21 a share.

Sozzi also says the takeover drama was an act of gamesmanship."[Schulze] played his hand perfectly. He's waited these guys out and now he's kind of won," says Sozzi, of Best Buy's limited options.
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