Best Buy: The Buyout That Never Was

NEW YORK ( TheStreet) -- It's official. Best Buy ( BBY) founder Richard Schulze won't be buying the company in a debt-fueled takeover involving a consortium of private equity firms.

Given some signs that private equity investors are returning to the table to cut deals of a size not seen since the financial crisis, a key question is whether Schulze's initial proposal that valued Best Buy at $8.8 billion can be taken as a credible sign of demand.

Increasingly, it appears that the over half-year saga of Best Buy's takeover should be nixed from the history books. As it turns out, Schulze's efforts may have amounted to the buyout that never was.

In the end, Securities and Exchange filings show private equity investors were at the table with a formal offer for the company, but just a minority stake that Best Buy chief executive Hubert Joly characterized as "excessive and dilutive" to shareholders on a Friday earnings call.

The private equity investment amounted to about $1 billion, a source familiar with the negotiations said. Given Schulze's initial August takeover proposal, which included his over 20% holding of Best Buy shares, it appears that the Best Buy founder was far from raising the equity funding to make an offer for the company that its Board of Directors would have to consider.

"The company's firm view was that no qualified offer to take the company private was ever made," said another source familiar with the negotiations.

That source added private equity investors with a minority investment offer for Best Buy were acting independently of Schulze, who had successfully pushed the company into a formal due diligence process that was extended twice before concluding without a bid.

"The deadline by which Mr. Schulze could make an offer to acquire the company expired yesterday, February 28, 2013, at the end of the day. The company received no such offer and will continue to focus on its transformation for the benefit of all of its stakeholders," Best Buy said in a statement.

In August, Citigroup analysts calculated that Schulze's proposal would need up to $5 billion in debt financing and $3 billion in equity capital committed by a private equity consortium. Schulze's initial letter said Credit Suisse ( CS) had been tapped as a financial advisor and was "highly confident" it could arrange the necessary debt financing.

While Schulze's failure to follow through on an offer, even at a price below his initial proposal, may disappoint investors who might have been receptive to a $24-to-$26 a share bid, the Best Buy founder appears to remain a key player in the company's turnaround.

"He is our founder and largest shareholder," Joly said in an interview with Bloomberg News.

"Our mission is to transform the performance of the company for the benefit of all stakeholders. I look forward to working with him going forward."

On Friday's conference call, CEO Joly credited Schulze with introducing Best Buy to the private equity consortium. "During the process, Dick introduced to the company several impressive private equity sponsors, who all expressed interest in an investment in Best Buy," he said.

A source said those private equity firms were Cerberus Capital Management, TPG Capital and Leonard Green & Partners, confirming previous media reports.

"Mr. Schulze facilitated various offers that would have resulted in the investment of new equity into the Company by up to three leading private equity firms," a 13-D filing states on Schulze's behalf.

According to the disclosure, each private equity firm would have been given a board seat and Schulze would also be able to nominate two directors to Best Buy's board. "Mr. Schulze has not made any determination as to whether or not he will exercise his right to appoint his own two nominees to the Company's board of directors," the filing states.

For investors, there appear to be two takeaways from Best Buy's earnings and an end to the company's takeover.

Investors may do well to erase the terms of Schulze's proposed $8.8 billion deal from their memory, given the lack of a formal offer for the company at any price.

Meanwhile, after two disastrous quarterly earnings reports, the company's Friday earnings indicate a stabilization of business.

The Richfield, Minn.-based company reported a fourth-quarter loss of $409 million, or $1.21 a share, that beat analyst expectations and showed a significant narrowing from 2012. Excluding writedowns and restructuring costs, Best Buy earned $1.64 a share in diluted earnings for continuing operations, also beating estimates.

Notably, the company was able to report a small year-over-year increase in revenue, posting $16.7 billion in sales for the quarter ended Feb. 2, as same store sales rose about 1%.

Both figures represented small growth, rebutting expectations of a continued decline in business.

Oppenheimer analyst Brian Nagel said in a client note that the earnings beat was encouraging, especially as the distraction of takeover talks dissipates and recently appointed chief executive Hubert Joly gets further time to execute a turnaround plan.

"Given this is the first quarter that is somewhat impacted from Best Buy's new leadership, results are encouraging in that certain aspects of a turnaround are beginning to take hold," Peter J. Keith, a Piper Jaffray analyst, wrote in a note to clients.

Recently, Best Buy announced it will extend a price match offer for its in-store electronics goods, in a move that might help it defend sales from online retailer Amazon ( AMZN).

Investors in Best Buy have to refocus on the company's operating results, over the uncertainty of its takeover prospects. In that sense, they might do well to view Schulze's initial proposal as a deal that never was.

The company's shares ended Friday trading up over 4% to $17.16, closing just below trading levels prior to Schulze's August letter.

Best Buy and another management buyout effort, the $13.65 a share bid for Dell ( DELL) may indicate revived animal spirits by private equity firms to cut large deals, however, it might be early to call a trend.

-- Written by Antoine Gara in New York

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