How Likely Is It that founder Richard Schulze's Deal for Best Buy Will Go Through?

Aug 6, 2012 -

What is the deal? 

R. Schulze is offering $24 to $26 per share for the approximately 80% remaining shares he does not yet already own. This offer would approximate 8.8B for 100% ownership of Best Buy. 

Of that 8.8B, 1B will be sourced from Richard Schulze. As for the remaining balance, R. Schulze expects to finance it through private equity and debt. 

Is R. Schulze's Best Buy offer a good deal?

Currently Best Buy (BBY) is trading at just under $20 per share. If the deal were to close today, it would represent a 20%-30% gain for investors. Sounds like a win for the investors to me. 

Hold on a second.

If we take Best Buy's yearly free cash flow average using the last three years ($2.527, $446K, $1.591M), we get approximately $1.5M. At an offer of $8.8B less the 1B he will source himself, R. Schulze will be able to pay back the debt in about five years. This is not a bad deal for him.

Free cash flow was calculated using actual figures from the SEC filed 10-K taking operating cash flow and subtracting capital expenditures.

As per Investopedia:
Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.

How likely is this deal to go through? 

R. Schulze wrote the following in his unsolicited, highly conditional indication of interest letter to Best Buy:
As you know, Hatim, I have made repeated requests to the Board for several weeks now to provide me with due diligence information and the consent to form a group required under Minnesota law. In your most recent communication to my advisors, you indicated that the Board would need an additional three weeks before it could consider my requests. I am submitting this letter in the hope that, with a concrete proposal in front of it, the Board will have a compelling basis on which to grant my requests and avoid further delay. 
From the above, it is safe to assume that Best Buy's board of directors has been aware of R. Schulze's interest in purchasing the company. Despite this, the Board had not taken action in the time leading up to this SEC filing. This suggests that they either need more time to do their due diligence or are frankly not interested.

The market has taken a toil lately and along with that BBY stock has taken a tumble. Could Schulze be trying to time the purchase? Is he afraid that the stock may rise within three weeks? If he truly believed that he would be able to take Best Buy back to its glory days, why didn't he do so in the past year or so before he resigned? He believe removing Best Buy from the public spotlight would help its progress. But, is that really a major factor to consider in reviving BBY? Would the Board truly consider selling the company given its efforts to find an interim CEO and Chairman of the Board? These are all rhetorical questions and questions we should be asking.

While we may not know the answers to these questions, one thing is for sure. Even though news has broken out of Schulze's interest, the stock remains below his offer price. This suggests that the market itself does not believe that this deal will go through.  Unless we are inside the deliberation chambers,  at this point, any speculation is just speculation.

Disclaimer: Article is written for informational purposes. It isn't intended as investment advice.
Disclosure: I have no position in BBY.
 
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