Staples or Best Buy: Which One Is Better Buyout Bait?

by Marc Bastow | September 27, 2012 7:30 am

Take two companies in dying, or at best, severely pressured, industries, add in investors who feel the companies have the potential to pull themselves out of financial difficulties and mix with investment banks drooling at the opportunity to make a few bucks. What does that give you?

Best Buy (NYSE:BBY[1]) and Staples (NASDAQ:SPLS[2]). By almost any measure, both companies are between the rock of unsustainable business models and hard place of (previous) owners who want a piece, if not all, of their pie back.

Both companies are “in play” right now as candidates for privatization, with the efforts of Best Buy founder Richard Schulze well out in front of those from Staples’ Bain Capital, if only because Schulze was stung by his old company first.

Regardless of the reason, both companies need a white knight. The question for investors is: If you had to play one or the other strictly on buyout potential, which would you choose?

The ills of both are fairly well known at this point, but worth a quick update:

Staples is in the office retail and supply business, and in addition to its bricks-and-mortar operations is the second-largest e-tailer behind Amazon (NASDAQ:AMZN[3]). Despite some very good years[4] during the recent economic downturn, the stock has lost nearly 45% over the last five years, and Bain Capital, one of Staples’ original investors, is making waves about taking it private[5].

Staples’ most recent quarterly earnings[6] picture was dismal, and indeed, the whole office supply industry, which includes direct competitors Office Depot (NYSE:ODP[7]) and Office Max (NYSE:OMX[8]), is suffering.

On Tuesday, Staples announced a huge round of store closings both in the U.S. and Europe, and some giant charges: $250 million for the closings, another $850 million for goodwill write-offs from European operations and $20 million related to the sale of another European operation. Do the math: over $1 billion in charges for the quarter. Wow.

Best Buy is in just as bad a shape as it sits around waiting for Schulze and his investment adviser Credit Suisse (NYSE:CS[9]) to root around the books and come up with a price tag. Of course, Schulze gave away a little bit earlier[10] this year when he tossed around a $24 to $26 per share price tag, but things have deteriorated since. The company continues to close stores, cut employees and in a minor slap in the face to good sense, has shelled out[11] $3 billion to buy back stock since 2010. Its net loss on the investment is $1.3 billion to date.

The stock has lost over 50% of its value over a similar period, and it’s unlikely to withstand the competition down the road from Target (NYSE:TGT[12]), Wal-Mart (NYSE:WMT[13]) and of course Amazon.

What’s an investment banker or investor to do? Let’s take a quick look at some numbers and decide:

MKT. CAP EST. PRICE TAG TOTAL CASH FREE CASHFLOW LONG-TERM DEBT
BBY $5.8B $7B $680M ($776)M $2.2B
SPLS $8.1B $9B $984M $36M $2.0B

This is a pretty close contest, isn’t it? Neither company screams bargain, and neither looks like it has a future larded with additional debt burdens. But remember, all we care about is the likelihood of a sale because once it’s gone, the business is someone else’s to run and worry about.

But you know what? They both stink on toast. Sorry, but an estimated 54% premium to own Staples and a 41% premium for Best Buy just seem ludicrous to me, and the reality is neither should get anywhere near those values from potential investors.

Which means that if you’re already a shareholder, suck it up, collect whatever dividends either can muster, hold your breath and take whatever offer comes along.

And if you haven’t committed any money by now, don’t bother. Sorry, sometimes there are no winners.

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

Endnotes:
  1. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  2. SPLS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPLS
  3. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  4. very good years: http://investorplace.com/2012/02/staples-spls-office-depot-odp-stocks-to-buy-short/
  5. taking it private: http://investorplace.com/2012/09/more-private-time-for-staples-spls-amzn-bby/
  6. recent quarterly earnings: http://investorplace.com/2012/08/staples-shares-plunge-on-weak-q2-results/
  7. ODP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ODP
  8. OMX: http://studio-5.financialcontent.com/investplace/quote?Symbol=OEM
  9. CS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CS
  10. Schulze gave away a little bit earlier: http://investorplace.com/2012/08/some-bby-advice-take-the-money-and-run-best-buy/
  11. shelled out: http://investorplace.com/2012/09/best-buy-illustrates-the-stupidity-of-buybacks-bby/
  12. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  13. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT

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