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Best Buy Surges on Exit from European Joint Venture (Update 1)

NEW YORK ( TheStreet) - Best Buy (BBY - Get Report) shares surged to a 52-week-high on Tuesday as the company said it sold its stake in a five-year-old European joint venture with London-listed Carphone Warehouse Group in a deal valued at $775 million.

The stock closed up 7.5% to $25.98. More than 22 million shares were traded on Tuesday, almost double the normal daily trading volume. Earlier in the day, the stock briefly hit a new 52-week-high of $26.92.

The Richfield, Minn.-based electronics retailer entered into an agreement on Monday that provides for the sale of the 50% interest held by the company in Best Buy Europe, its joint venture with Carphone Warehouse, according to a Securities and Exchange Commission filing today.

Best Buy will exit the venture while Carphone Warehouse will assume 100% ownership of the venture, the filing said.

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Best Buy also got a vote of confidence from Deutsche Bank (DB ) after analyst Mike Baker upgraded the stock to "buy" from "hold."

"We see a number of positive catalysts to come in 2013, including better than expected earnings results" in the first quarter, Baker wrote in a note on Tuesday.

>>>Best Buy's New Life After Takeover Trauma

"Other positives include continued cost cutting, which should drive long-term earnings power increases, potentially peaking competitive pressures, and a strong balance sheet that will at some point enable a resumption of buyback activity," the note says. "While the stock is up nearly 2x from the bottom, it's up only 5% in the past 12 months vs 13% and 15% for the S&P 500 and S&P Retail Index. It has come off 11% from the recent peak, enabling a good entry point."

Baker's new 12-month price target is $28.

The Deutsche Bank analyst also raise his first-quarter 2013 earnings estimate by a penny to 32 cents per share.

Baker's estimate comes in at the high range of earnings estimates for Best Buy. Analysts on average expect Best Buy to report first-quarter earnings of 24 cents a share.

According to the agreement, the total purchase price of the transaction is expected to be approximately $775 million, which will be payable to Best Buy shareholders as follows:
  • Approximately $573 million in cash at closing;
  • $124 million in the form of ordinary shares of CPW at closing;
  • $39 million, plus 2.5% interest per year, in cash on the first anniversary of closing;
  • Finally, another $39 million, plus 2.5% interest per year, in cash on the second anniversary of closing.

Beginning in the first quarter of fiscal 2014, Best Buy intends to report the results of the Best Buy Europe joint venture in discontinued operations, including an estimated non-cash asset impairment charge of approximately $200 million, associated with accumulated foreign currency translation losses that will be written off at the time of closing.

Prior to entering into this agreement, U.S. GAAP revenues for Best Buy Europe in fiscal 2014 were expected to be in the range of $5.5 to $5.6 billion.

"After reviewing the business and spending time with our partners, we concluded that the timing and economics were right to enter into this agreement with CPW," said Hubert Joly, Best Buy's president and CEO, in a statement.

The transaction allows Best Buy to "simplify our business," substantially improve the company's return on invested capital and "strengthen our balance sheet," Joly said.

But he cautioned that investors should not infer further asset dispositions of other international businesses. "Each international market is different and the sale of our European operations should not suggest any similar action in our other international businesses," Joly said.

The sale is expected to be completed during Best Buy's fiscal second quarter.

At closing, Best Buy has also agreed to pay CPW approximately $45 million to satisfy outstanding obligations under existing agreements between Best Buy and CPW, including the parties' Global Connect partnership, which will now be terminated, with CPW no longer holding any interests in Best Buy's mobile businesses in Mexico and China.

The companies will continue their pre-existing non-compete restrictions, which states that for three years after closing, Best Buy will not compete with CPW's business in the United Kingdom, Republic of Ireland, Spain, the Netherlands, Germany, Portugal, France and Sweden. CPW will not compete with Best Buy's business in the U.S., Canada, and Mexico. CPW will also not compete with Best Buy's mobile business in China for the 18 months after closing.

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