According to Reuters, Best Buy (BBY) founder Richard Schulze and four private equity firms have started examining the books of the world’s largest consumer electronics chain, in early steps toward what could become a potential $11 billion buyout. Apollo Global Management LLC, Cerberus Capital Management LP, TPG Capital LP and Leonard Green & Partners LP are among firms conducting due diligence on Best Buy. Additionally, Richard Schulze and his financial advisers at Credit Suisse Group AG still continue evaluating BBY. We first heard about his interest in August 2012. Schulze is also negotiating individually with the private equity firms to iron out details such as how much of his 20 percent stake in the company he would contribute in a bid, and what role he would play after the buyout.
Buyout or No Buyout: In August, Richard Schulze has said he could buy Best Buy for $24 to $26 a share, valuing it at $8.16 billion to $8.84 billion, or up to $10.9 billion including debt, which would make it the year’s biggest leveraged buyout so far. The company currently trades at $17.76, a trailing 12 month EBITDA multiple of 2.65x versus its competitors Wal-Mart (WMT) which trades at 8.5x and Amazon (AMZN) at 51x. And yes, I do think its fair to include AMZN as a competitor considering online sales is the big market today. After all, we spend more than half our day in front of a computer or a tablet.
The more important question here is, can Best Buy avoid a buyout at this point? Here are the facts: Last quarter, profits dropped 90%, US and overseas sales continue to drop, cash of $680 million as of Q2-2013 versus $1.4 billion in Q1-2013, and lets not forget the $1.7 billion in public debt in addition to the $519 million in a European credit facility. When you look at these numbers, the possible $11 billion buyout starts to look attractive. It would be tough for George Mikan to say No! A turnaround strategy for Best Buy is a long-term strategy and it just doesn’t benefit in the short term given the weak sales and high leverage. Given the competition in addition to the recessionary environment, Best Buy will have to evaluate the most recent buyout offer.
The chart below compares share performance over the past year. “E”s mark earning reports.
Conclusion: Today Best Buy has an alternative to slowly erasing itself from the retail market. A recessionary environment in a tough competitive landscape gives the company no room for recovery in the short run. An evaluation of a buyout would be the best alternative today.
Look here if you want to hear more about the competitive landscape of Best Buy.
Written by Sabina Bhatia.