Some BBY Advice: Take the Money and Run!

by Marc Bastow | August 6, 2012 12:56 pm

Some BBY Advice: Take the Money and Run!

Anyone working at Best Buy (NYSE:BBY[1]) this morning — and more importantly, anyone who has held on through the stock’s 20% downturn through last weekend — should start dancing in the proverbial aisles. Best Buy founder Richard Schulze made a bid to buy up the floundering company’s shares[2] for about $8.8 billion (between $24 to $26 per share) and take the company private.

Shares of BBY already soared 20% Monday morning to above $21 per share before falling back to 11% gains as of this writing.

Anybody want some free advice? If you haven’t already, take the money and run!

The proposed deal has been in the wind for some time now; at least one person (me) suggested the idea had both merit and possibility[3], and might be the only way to save the company. Hurrah if it does, oh well if it doesn’t, but either way, if Best Buy is going private, this is how it’s going to happen.

That’s because there won’t be a bidding war, and the current deal (at first blush) looks good enough to get through.

Yes, the upside of the bid price is still about 8% below the 52-week high, but nobody is going to ante up that high. BBY shares found a 52-week basement of just under $17 per share, and shares have lost a mighty 55% of their value in the past five years, and Best Buy’s business model is crumbling, so “appreciation” (in the event the deal does get nixed) is not going to happen as an ongoing public company.

Are you hoping BBY will find another buyer? It’s highly unlikely any of Best Buy’s e-tail competitors — such as Amazon (NASDAQ:AMZN[4]) or eBay (NASDAQ:EBAY[5]) — have any interest, and hardly anyone else is piping up.

As for holding on for the 3.5% dividend: If BBY’s path toward a private entity continues, you won’t see an increase anytime soon — in fact, you might be looking at a cost-savings cut down the road — and once the company goes private, bye bye, dividend.

A Good Plan for Life After Exchanges

No, Schulze is the shareholders’ best friend and the company’s last hope. He has been with the company since its founding in 1966, and the way he went out amid shame and scandal[6] is well documented — and certainly not the legacy he wants to leave. This is his shot at redemption, so let him take it on your behalf.

Mind you, it still won’t be easy: Schultze is said to be planning on using around $1 billion of his own money, and the rest will invariably come in part from some equity funds; Credit Suisse (NYSE:CS[7]) is signed up for that effort.

If he’s successful in luring them back, Schultze’s management team will include former CEO Brad Anderson and former president and COO Allen Lenzmeier, which should help in the effort to convince investors and lenders that the company is both viable and sustainable.

Best Buy already has $2.2 billion in debt on the balance sheet, offset by $1 billion in cash on hand, so adding another $5 billion to $6 billion in debt is a mammoth burden, and supporting that level of debt will require some serious cash flow. Look for store closings, layoffs, cutbacks in inventories and a more focused effort to provide customers the ability to purchase items online.

Bottom Line

It’s a tough road ahead, but the good news for Best Buy is that, as a private company, quarterly Street targets won’t be a drag on the company, and with Schulze back in the saddle, maybe the company can emerge on the other side of the tunnel looking like a different company.

The good news for current BBY holders: You got a nice bump today that you likely weren’t going to see otherwise. Take advantage of it while you can.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  2. made a bid to buy up the floundering company’s shares: http://investorplace.com/2012/08/best-buy-founder-wants-to-buy-the-company/
  3. suggested the idea had both merit and possibility: http://investorplace.com/2012/07/best-buys-last-chance-may-be-coming-soon-bby-amzn-ebay-dell-hpq-wmt-tgt/
  4. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  5. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  6. amid shame and scandal: http://investorplace.com/2012/05/best-buy-chairman-resigns-after-ceo-inquiry/
  7. CS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CS

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