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Best Buy: A Cynical March to a Buyout

Still, it's hard to feel bad for shareholders who might have seen the initial $24 to $26 a share "proposal" as an actual takeout price. [Best Buy shares last traded over $20 in the wake of Schulze's proposal.]

The company's faced obvious competitive pressure from the likes of Amazon (AMZN) and Wal-Mart (WMT) for years and the company's board, which was chaired by Schulze until a scandal caused his ouster earlier in 2012, has done little to adapt to a fast-changing retail market. The recent appointment of Hubert Joly as CEO faced stiff criticism and only tracks a narrative of mismanagement.

The debt-financed takeout Schulze may unveil is also about the last thing Best Buy and its employees need financially. Already the company is rated junk by rating agencies, and its cash balances indicate increasingly limited financial flexibility for a prospective turnaround.

In Best Buy's most recent earnings, cash and cash equivalents at the retailer fell to $309 million, from over $2 billion a year ago. Meanwhile, the headline on Best Buy's earnings release is equally dire. "Best Buy Confirms Significant Decline in Fiscal Third Quarter 2013 Earnings," wrotes the company in late November.





When Schulze made his initial proposal, ratings agencies cautioned that a debt financed takeout could further cloud Best Buy's financial picture. In reaction to the proposal, 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.

"[A] meaningfully debt-financed transaction by Mr. Schulze would weaken Best Buy's credit protection metrics considerably from current levels," wrote S&P credit analyst Jayne Ross in the Aug. 6 downgrade, which also cited concerns about the company's current business model and competitive pressures in the retail sector.

In the case of a Best Buy buyout, there appear to be few winners. Best Buy investor may be forced to sell near 10-year lows for the company's stock. Meanwhile, the probability that Best Buy succeeds becomes increasingly remote with every billion in debt Schulze's prospective takeout adds to the company's balance sheet.

Still, there may be justice. The company's takeover has always been a case of caveat emptor and no person may find this out more than Schulze, who owns roughly 20% of Best Buy shares and could face further losses in a takeover.

-- Written by Antoine Gara in New York

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