Best Buy Earnings: You Break It, You Best Buy It Part II

NEW YORK (TheStreet) -- This just in. Best Buy (BBY) reported worse than expected earnings and investors are still skeptical of a premium-priced buyout proposal from ousted chairman and company founder Richard Schulze.

Basically, nothing's changed.

As TheStreet noted in August after Best Buy cut its earnings outlook, it's time for Schulze to put up or shut up on a multi-billion dollar takeover proposal that's been discounted by investors since first being floated to the public this summer.

Third quarter earnings, which showed a disappointing net loss of $13 million, or 4 cents a share, and a 4.3% drop in same store sales, only give investors more reason to be skeptical of Schulze's motives in slow-playing a takeover deal.

From the first indication of Schulze take-private interest, the prospects of a deal have seemed sketchy at best. That is especially true given the price tag of Best Buy and Schulze's reluctance to put out a formal offer. In fact, Schulze's machinations resemble those used by activist investor Carl Icahn when opening tender offer campaigns that can stretch months without resulting in a deal.

With Best Buy having agreed to open its books to Schulze and media reports that private equity giants are lining up for a bid on the electronics retailer, time is of the essence. Cash and cash equivalents at the retailer have fallen 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," writes the company.

Shares in Best Buy tumbled over 13% to 10-year lows of $11.96 a share in Tuesday trading.

As investors eat further losses that put Best Buy's year-to-date stock drop at nearly 50%, the only person who's likely to be celebrating is Schulze.

After all, the recently ousted chairman recently dropped an initial takeover 'proposal' as high as $26 a share to $20 a share earlier in November. Now, with Best Buy's market cap falling below $5 billion, the prospect that Schulze can arrange the financing for a takeover seems more plausible. That is, if Schulze is truly interested in retaking the reins of Best Buy.

Were his proposals nothing more than an effort to generate M&A interest or a stock pop, the company's continued share plunge would hit Schulze, who owns over 20% of Best Buy shares, hardest.

Meanwhile, waving a premium priced non-bid to public investors and watching an accelerating deterioration in Best Buy's earnings and cash position is no way to go about business.

If Schulze wants Best Buy and thinks he can turn the company around -- as he indicated in multiple letters to company management -- he needs to stick with his takeover proposals and submit a formal offer.

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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