Best Buy and founder Richard Schulze have ended talks whereby he and private equity investors were seeking three board seats in exchange for acquiring a minority stake in the consumer electronics giant, Bloomberg reported. Schulze wasn’t able to line up debt and equity financing, according to sources cited by the news service. Schulze’s attempt to arrange a smaller deal with Cerberus Capital Management, TPG Capital and Leonard Green & Partners also ended. Hopes a deal might be achieved had risen earlier this year after Best Buy posted better-than-expected holiday sales. With a stake of about 20% Schulze is the company’s biggest shareholder and had sought since last year to take over the company he founded more than 40 years ago. He resigned as chairman in June and new CEO Hubert Joly has since stabilized sales, closing some stores and improving e-commerce operations. Schulze might still come up with a last-ditch proposal but it seems unlikely. Best Buy reports Q4 earnings Friday.
The retailer’s stock is up 5% pre-market after it disclosed that sales in the nine weeks ending January 5 fell just 0.4% vs the same period last year to $12.8B. Revenues at stores open at least a year were down 1.4% beating forecasts for a 2% drop, and all of the decline came from overseas. Domestic store sales were flat with growth in mobile phones, tablets and eReaders, and appliances offsetting declines in entertainment, TV sets and computers. Meanwhile, revenues at Best Buy’s online operation were up 10% to $1.1B. “Our holiday selling strategy, backed by a compelling assortment, increased employee training and price match policy, allowed us to deliver these results,” CEO Hubert Joly says. Based on what the company calls its “solid performance” over the holidays, Best Buy reiterated its cash flow forecast for its fiscal year. But just as important for investors, the results should relieve fears that a lousy holiday sales period might derail company founder Richard Schulze’s effort to buy the struggling electronics and home entertainment chain.
Richard Schulze wants to see Best Buy‘s holiday-season sales performance before he and his backers decide how to handle their potential bid for the consumer electronics chain. He and the company said today that they’ve extended the agreement from August that enables Schulze to see confidential company information: He now can make a proposal sometime in February, and the board would have 30 days to respond. The news sent Best Buy shares tumbling more than 15% this morning, reversing yesterday’s gains after the Minneapolis Star Tribune reported that Schulze was preparing to offer as much as $6B for the company ”by the end of the week, possibly on Friday.” Under the amended agreement with Schulze, Best Buy says it will extend the deadline — to March 15 from February 22 — to notify investors of shareholder proposals ahead of the 2013 annual meeting. Best Buy plans to announce its holiday-season sales January 11, and report Q4 earnings on February 28.
The stock is up about 15% this morning after the Minneapolis-based company’s home town paper, the Star Tribune, reported that founder Richard Schulze will make “a fully financed offer” of as much as $6B for Best Buy ”by the end of the week, possibly on Friday.” The potential offer contrasts with the $8.8B proposal Schulze made in August. But Best Buy shares have declined more than 20% since then as it reported softer than expected earnings — which CEO Hubert Joly said were “clearly unsatisfactory” – and lowered its financial forecasts. Bankers and private equity said to be backing Schulze include Cerberus, Leonard Greene & Partner and the Texas Pacific Group,. He’s also working with the consumer electronics chain’s former CEO Brad Anderson and former president Al Lenzmeier. Schulze, who launched the company in 1966, resigned from the board in June. That upended a face-saving deal he made with the board after its Audit Committee said in a report that Schulze helped to cover up former CEO Brian Dunn’s “inappropriate relationship” with a female employee. Corporate law in Minneapolis makes it virtually impossible to mount a hostile takeover. But Schulze’s relationship with the company is said to have warmed as its business performance cooled, in large part due to its inability to keep up with rivals including Amazon and Walmart. In August Best Buy gave him permission to proceed with an effort to …
The agreement announced today clears the way for Richard Schulze to move forward with his plan to buy the consumer electronics chain and sent Best Buy shares up more than 7 percent to $18.55 in morning trading. Best Buy says the agreement will allow Schulze to get access to confidential financial statements and allow him to form an investment group with private equity sponsors to make the bid. He already owns 20 percent of the company’s stock. The retailer says the agreement establishes a non-exclusive orderly process for a bid while protecting the interests of all shareholders. Schulze says he’s pleased that an agreement was reached “which will allow him to conduct the due diligence he had sought”. Under the agreement, Schulze and his potential partners will then have 60 days to present a fully financed proposal. If Best Buy’s board reject’s Schulze’s proposal, they will have until January 2013 to present a second proposal. Best Buy’s board would have 30 days to review the second proposal before Schulze can take the offer directly to shareholders at the company’s annual meeting or a special meeting. If the second offer is turned down by both the board and Best Buy’s shareholders, he would have to wait one year before offering another proposal. In a letter to the board earlier this month, Schulze urged support for his effort to take the consumer electronics chain private, saying he’s “deeply concerned …
Best Buy reported second quarter earnings Tuesday morning with net income down 91% to $12M, widely falling short of Wall Street estimates. Revenues were $10.55B, down 3% on the same period a year ago as bricks & mortar sales continue to decline. The news was met with a share price drop of 9% in pre-market trading for the struggling consumer electronics retailer. The company said it had reduced its annual earnings expectations, due to “lowered expectations for industry wide sales and the uncertainty associated with several key product launches expected in the second half” of the year. Best Buy also said it would not provide further forecasts for 2013, having just hired a new CEO who won’t take up his post until September. The company did allow that it expects to generate free cash flows of $1.25B to $1.5B for fiscal 2013.
On Monday, Best Buy announced the appointment of turnaround specialist Hubert Joly. Investors respnded with a 10% drop in the share price at yesterday’s close. Wedbush Securities analyst Michael Pachter wrote in a note on Monday, “We find Mr. Joly’s résumé unimpressive, and believe he lacks sufficient experience to engineer a turnaround at Best Buy,” according to DealBook. Joly, a Frenchman who was most recently at the head of travel and hospitality group Carlson, is lacking retail U.S. experience, Pachter contended. But Oppenheimer & Co analyst Brian Nagel told Bloomberg News …
2ND UPDATE, 5:53AM: Best Buy has officially announced the appointment of turnaround expert Hubert Joly as president and CEO, replacing interim CEO G. Mike Mikan. In a statement this morning, Best Buy board chairman, Hatim Tyabji, said: “Hubert’s range and depth of experience in transforming companies is exactly what the company needs at the moment, as is his energetic, imaginative and experienced leadership in executing strategies.” Joly will also join the company board.
UPDATE, 1:05AM: Amid the back-and-forth over Richard Schulze’s bid to acquire the struggling Best Buy, the company has found a new CEO in Frenchman Hubert Joly, The Wall Street Journal reports. Joly resigned as chief exec of global hospitality and travel company Carlson on Sunday. According to The Journal, Joly has been successful at turning around media and technology companies including a restructure of Vivendi’s videogame business. He is expected to take up his post in September. Best Buy will report earnings tomorrow and is expected to further outline its own turnaround plans at that time.
PREVIOUS: Last week, Best Buy founder Richard Schulze urged the company’s board to allow him to proceed with his effort to take the consumer electronics chain private at a valuation of about $8.8B. Yesterday, Best Buy said the board offered Schulze an opportunity to conduct due diligence and pursue his interest, but that Schulze declined to participate.
Richard Schulze made the plea in a letter he sent today to the board. It seems to be part of a PR campaign to rally shareholder support for his effort to take the consumer electronics chain private — in the hope that investors will pressure the board to cooperate with him. “I am deeply concerned about the direction of the company and, as Best Buy’s largest shareholder, I cannot simply stand aside,” he says. Last week Schulze, who controls 20.1% of the equity, said he was prepared to offer as much as $26 a share for the company, roughly $8.8B. (It closed yesterday at $19.36.) Schulze says today that the board dismissed his offer as a “highly conditional indication of interest” and hasn’t allowed him to form a group of private equity firms and lenders that could look at the books to solidify their offer. “I still hope to work with the Board on a mutually beneficial transaction – but you should know that I am not going away,” Schulze writes. “All I am asking is your permission to conduct due diligence and form a group so that I can quickly be in a position to give the Board a fully financed offer for your consideration.” Best Buy is incorporated in Minnesota, and the laws there make it virtually impossible for someone to acquire a company if the board opposes it.
The stock price tells the basic story. If investors believed that Best Buy founder Richard Schulze was likely to succeed with the plan he unveiled yesterday then the company’s shares would be trading close to his proposed offer of as much as $26 a share. Instead they’ve settled in at about $19.90. One reason for the doubt: Best Buy is incorporated in Minnesota which sets an unusually high bar for hostile takeovers. Acquirers who don’t have board approval must own their stock in a target company for at least four years — and then win the support of owners of 80% of the voting shares. That’s too high a threshold even for Schulze, who controls 20.1% of Best Buy’s voting shares. And the conventional wisdom is that the board likely won’t support his offer. At the very least they’d want a higher bid, perhaps more than $30 a share, Jefferies Equity Research analyst Daniel Binder says in a report today. Directors
The company’s stock is up about 19% to around $21 in early trading following the disclosure of the offer from Richard Schulze. In a letter today to board Chairman Hatim Tyabji, Schulze said that his adviser, Credit Suisse, is “highly confident that it can arrange the necessary debt financing” to pay as much as $26 a share for Best Buy — 47% more than its closing price on Friday. “I believe there is an urgent need for Best Buy to reinvigorate growth by reconnecting with today’s customers and building pathways to the next generation of consumers,” the letter says. His proposed acquisition “would allow Best Buy to take the actions that it needs to take outside of the public sphere.” Schulze is by far the largest shareholder, with 20.1% of Best Buy’s shares. He resigned from the board in June, upending a face-saving arrangement reached in May after the Audit Committee said in a report that Schulze helped to cover up former CEO Brian Dunn’s “inappropriate relationship” with a female employee.
Here’s Schulze’s letter:
There has to be a fascinating back story to the Best Buy soap opera. In the latest twist, Best Buy says that company founder Richard Schulze told directors this morning that he would “resign from the board, including the chairmanship, effective immediately.” The head of the board’s Audit Committee, Hatim Tyabji, was named the new chairman. Schultze said in a separate statement that he made his decision “in order to explore all available options for my ownership stake.” He’s by far the largest shareholder, with 20.1% of Best Buy’s shares. The announcement upends a face-saving arrangement reached last month after the Audit Committee said in a report that Schulze helped to cover up former CEO Brian Dunn’s “inappropriate relationship” with a female employee. The multi-billionaire agreed to remain on the board as chairman until the June 21 annual meeting when Tyabji would take the gavel. Schulze then would stay to the end of his term next year with an honorary title of Founder and Chairman Emeritus. It was a humiliating come-down for
Richard Schulze will remain on the board to the end of his term next year but will just have an honorary title at the consumer electronics retail chain after the board’s Audit Committee said in a report that he helped to cover up former CEO Brian Dunn’s “inappropriate relationship” with a female employee. That’s a big come-down for Schulze, who became a multi-billionaire by turning his Sound Of Music Store founded in St. Paul in 1966 into one of the country’s largest sellers of consumer electronics and entertainment. The report says Schulze found out about Dunn’s relationship in late 2011 but kept it to himself after the CEO “adamantly denied” any impropriety. The board first learned of the relationship in March. Dunn resigned last month. He was paid $6.6M as part of his separation agreement. In addition to the changes at the top, Best Buy says it will now support annual election of all board members — a change favored by corporate governance activists. Best Buy shares are down 17% so far in 2012 as the chain struggles to keep up with competition from online retailers led by Amazon. Here’s Best Buy’s announcement: