Best Buy Buyout Hopes Dim on Black Friday

NEW YORK ( TheStreet) - It may be Black Friday at Best Buy ( BBY), but recent earnings, analyst comments and a a slow burning takeout proposal by the company's founder Richard Schulze, indicate the company's far from a steal in the M&A world.

The question now is whether Black Friday discount euphoria wears onto Schulze and other prospective Best Buy buyout investors after the weak earnings have put the company stock on a holiday season sale.

The Richfield, Minn-based retailer's shares are off over 50% year-to-date and nearly 25% in the past five trading days as falling earnings continue to muddle the company's future in an electronics retail world that's increasingly moving online and into branded manufacturer outlets.

Still, there is the prospect that founder Richard Schulze's long choreographed interest taking Best Buy private gives investors some reason to cheer this holiday season.

After gaining access to the company's books and lowering the price of his takeout proposal to $20 a share from as high as $26 a share, Schulze is running out of excuses to stall a formal offer - were he truly interested in the company.

Brian Sozzi, chief equity strategist for NBG Productions sees reason to believe a Best Buy buyout may be in the cards this holiday season, given the company's sharp stock slide.

"I think it is going to have to be something well under $20," says Sozzi of Schulze's buyout proposal. He adds Schulze may have played a strong hand in moving slowly with a buyout proposal that's still not a formal offer for management or shareholders to consider. "If management doesn't take the cash deal, they are going to be left to die in the public market," he adds of the prospective offer, and highlights the challenges other large publicly traded retailers like J.C. Penney ( JCP) face in trying to execute transformation strategies.

Lining up alongside customers outside Best Buy stores to size up Black Friday deals, Sozzi says he was disappointed by crowds at the electronics retailer, in contrast to Target ( TGT) and Wal-Mart ( WMT) and the discounts likely to be available on Amazon ( AMZN) on Monday.

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 in August.

Earlier in November, the electronics retailer reported worse than expected earnings that raise questions on the sustainability of the company's finances add to skepticism that the company will be acquired by a competitor or a consortium of private buyers.

On Nov. 21, Jefferies analyst Daniel Binder cut Best Buy's price target to $13 from $18, citing a dimming prospect of a premium priced takeout for the struggling retailer. Binder highlighted deteriorating operating results, weakness in international operations and 'sharply lowered' free cash flow as likely the biggest concerns for prospective buyers.

Meanwhile, Binder adds that earnings are likely to remain challenged by the likes of retailers Wal-Mart ( WMT) and Amazon ( AMZN), and an electronics industry shift to Apple ( AAPL) products, which may last far longer than this year's holiday season.

"Even investors playing this as a speculative trade on a takeout are probably getting nervous at this point as earnings and free cash flow forecasts drop precipitously and potentially lower odds of a deal," wrote Binder, in a note to clients.

On Monday, TheStreet Ratings downgraded Best Buy's stock as a result a waning outlook in coming quarters.

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.

Unfortunately, the company's calendar 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.

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 from Best Buy's Nov. 21 earnings release is equally dire. "Best Buy Confirms Significant Decline in Fiscal Third Quarter 2013 Earnings," writes the company.

In Schulze's case, he still needs to submit a valid offer for shareholders to even consider.

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 proposal, Schulze now needs to drum a Best Buy bid, which may match the discounting spirit seen in the company's shoppers on Friday.

-- Written by Antoine Gara in New York