Best Buy-Out Looms! No Exchanges, No Refunds!

NEW YORK (TheStreet) -- It says a lot about the depths to which a company has fallen when its biggest compliment is "At least we weren't as bad as the next guy". That's all well and good so long as the "next guy" is not hanging on for dear life.

In this case, the "next guy" is Radio Shack ( RSH) and the company to which I'm referring is electronics retail giant Best Buy ( BBY), a company that has now arrived at the crossroad with some serious decisions to make.

The company's founder and largest shareholder, Richard Schulze, recently offered to take the company private. I would imagine the terms of the deal ($24 to $26 per share) were considered unfavorable since it appeared Best Buy's board wasn't exactly doing cartwheels around its headquarters.

But I wonder if the bid, regardless of amount, is what the company's shareholders should favor at this juncture. It's hard enough that Best Buy is losing ground in its dinosaur big box model to others such as Wal-Mart ( WMT). But can it ever overcome the biggest threat to its future, from Amazon ( AMZN)?

If the company thinks it can, then it is fairly an easy decision to make. Continue on as it has and give its newly hired CEO, Hubert Joly, enough time to turn things around. But how long are investors willing to wait? It seems it would be easier to bow out gracefully by accepting Schulze's offer and look for greener pastures. "Green" is something the company may not see again for quite some time.

This was especially evident in its most recent earnings report.

Best Buy's fiscal second quarter was pretty bad. Although revenue arrived somewhat better than the worse forecast (how's that for glass-full?), sales dropped by 3% annually. Even more problematic was the 3.2% drop in comps, reminding investors there are bigger fundamental problems than initially feared.

What's more, its one-point decline in margins reflected an eroding model while its operating income dropped by 50%. The result was a significant miss with a reported 20 cents per share; analysts were expecting 33 cents.

I don't think anyone can feel good about the company's prospects, even those with the most optimistic outlook.

Speaking of which, Best Buy's management opted to not provide an outlook for the rest of the year. You can draw your own conclusions from that. But what it tells me is that management does not have a pulse of the company nor the confidence to project how it plans to execute. So it would seem that Schulze's offer just might be more appealing at this point than previously thought.

I'm also inclined to think it is possible the company's unwillingness to issue guidance could be a strategy aimed at not disrupting its valuation too much in the event that it again underperforms in the next quarter. I don't think another miss would come as a surprise to anyone at this point. The only surprise here is the company is making this decision harder than it needs to be. Clearly, it is not going to beat Wal-Mart at its own game. Competing with Amazon? Forget about it.

Can Joly manage the company well enough that it does not reach a point where "saving it" is no longer an option? Will Schulze sit idly while watching his personal wealth erode? I think there are a lot of similarities here with what happened recently at Yahoo! ( YHOO) when Marissa Mayer took over at the urging of a disgruntled shareholder Daniel Loeb.

Best Buy's life is at stake, and it should seriously consider taking the offer that is now on the table from Schulze and apply a strict policy of no exchanges and no refunds.

The stock is down 50% from where it was a year and a half ago at $36. Now trading just under $18, investors should begin to wonder, what is to stop it from going into single digits by this time next year? I think this is what Schulze (as noted, its biggest shareholder) understands.

If $26 per share is considered, Schulze would be offering a 44% premium for Best Buy above its current valuation. Hmmm. Let's see, on one hand you have 44% above market value and on the other hand you are looking dead in the face at Wal-Mart and Amazon -- and for good measure, let's throw in hhgregg ( HGG).

Best Buy shareholders should take this deal and not look back.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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